The ECB strategy review is just more of the same

This week is ECB time and this meeting is a material one on several counts. Things were revved up a bit last week by President Lagarde in interviews with Bloomberg and the Financial Times.

 we now have what I would call a simple, solid, symmetric two per cent target. So we express very firmly that we are determined to deliver two per cent. I think that is a big change.

Actually everyone thought that anyway but tucked in with it was a couple of attempts to mislead.

And maybe the really important third “s” is symmetry, because we affirm very clearly that there may be deviations up or down, either below or above two per cent and we state that we consider both deviations up or down as equally undesirable.

The new central banking mantra is to try to get inflation above target except in something of an echo of the Japanese situation there is a problem. Here is the Lagarde view.

Second, we also recognise the effectiveness of all the tools that we have in the toolbox.

Really? Let me now hand you over to Phillipe Martim a French economist in the Frankfurt Allegmeine today.

At the beginning of his theses there is a reference to “a failure” – that of the ECB. For a long time it has mostly fallen well below its self-imposed inflation target of 2 percent. “In 90 percent of the time between 2015 and today, inflation was below 1.9 percent,” states Martin; even in times of the D-Mark there was more price increase.”

Over a period in which the ECB has thrown the kitchen sink in monetary policy terms at inflation it has in general failed in its objective. Or as Phillipe puts it.

“Today the ECB already holds 25 percent of Europe’s national debt. How far should that go, about 100 percent? Will one day buy 100 percent of the Italian national debt? ”Martin emphasizes that he“ considers the worries in Germany to be legitimate ”. There is a “problem with budget discipline” when a central bank buys massive amounts of national debt. In addition, “the exit can create a crisis”.

I expect it to keep going with QE because it is caught in a trap but would advice caution with 100% numbers as there are some pension and insurance funds who have to hold bonds. So the “free float” available to be bought is probably more like 75% although we are chasing a moving target with so many being issued. As it holds around 40% ( Phillipe is behind the times) there is not the margin you might think.

But we find ourselves at the ECB probem which is that for all the hype it has a record of consistent failure regarding its inflation target. Also if you look at the growth performance of the Euro area it is in trouble too.

There was also a classic Lagarde fail.

 We are all on the same page. There’s a unanimous agreement. There is a total consensus around that foundational document, that constitution of ours.

This took us back to the early days of her Presidency when she promised to end the splits which had been seen in Mario Draghi’s tenure. Meanwhile only a day or two later.

ECB policy makers are split over changes to their language on monetary stimulus in draft documents being circulated before next week’s Governing Council meeting, sources say ( Bloomberg)

Listening To People

This has turned into something of a classic of the genre.

During the events that I participated in myself, and I heard it from other governors, key concerns revolved around, number one, climate change.

Exactly the same as Christine’s own priority. How convenient!

When it does not agree with what the ECB wants it gets neutered. So we have a good start.

The second concern that we heard loud and clear as well, was housing costs. Housing costs us a lot, we Europeans, and this was the case in many countries. Why is it not more taken into account in your measurement of inflation?

First tactic is to delay.

But second, because we know it’s going to take time,

Although as regular readers will recall we have been on this roundabout before as I followed a process which went on for 2/3 years and was then dropped. So in fact it should be quick.

But the next one is to water it down and frankly take away most of the point of doing it.

We will include housing prices through alternative indexes into our assessment of overall inflation.

The cost of owning a house, not house prices, right? 

We will include the consumption part of owning a house. So we will not include the investment part.

As you can see the interviewer saw straight through the attempt to mislead. The reason why she is dissembling is shown below.

Over the period 2010 until the first quarter of 2021, rents increased by 15.3% and house prices by 30.9%. ( Eurostat)

Deeper Negative Interest-Rates

Christine Lagarde clearly has the interest-rate issue on her mind.

given the effective low bound that we are close to, will have to continue being used.

Sadly she was not asked whether she thought it was the -0.5% Deposit Rate or the -1% rate on liquidity for banks? But we saw only a day later the ground being tilled for more,more more on her Twitter feed.

We have decided to move up a gear and start the investigation phase of the digital euro project. In the digital age people and firms should continue to have access to the safest form of money – central bank money.

Notice how it is presented as a gain for the individual which is always a be afraid, be very afraid moment. This is because it is the road to deeper negative interest-rates which Phillipe Martin would in some circumstances apply at 100%.

“If there were the digital euro, that is, the citizens had direct accounts at the central bank, that would be easy: If the money is not spent, it will expire, for example after a year.” Otherwise, prepay cards might also be distributed under certain circumstances that are invalid after one year.”

Even the IMF was only suggesting -3%.

Producer Prices

These may well be throwing another factor into the mix. From Germany earlier.

WIESBADEN – In June 2021, the index of producer prices for industrial products increased by 8.5% compared with June 2020. As reported by the Federal Statistical Office this was the highest increase compared to the corresponding month of the preceding year since January 1982 (+8.9%), when prices rose strongly during the second oil crisis. Compared with the preceding month May 2021 the overall index rose by 1.3% in June 2021.

The real issue here is the monthly increase and they turned last December and since then have been in a range between 0.7% and 1.5%. suggesting a Yazz type situation.

The only way is up baby

Comment

Christine Lagarde finds herself in quite a mess and may even have exceeded the Grand Old Duke of York.

Oh, the grand old Duke of York
He had ten thousand men
He marched them up to the top of the hill
And he marched them down again

There was a collective failure in her appointment as after the “Euro Boom” it was considered safe to appoint someone with her track record because Mario Draghi could set policy for the opening year or two. That went wrong quite quickly.

Next comes her claim of healing divisions when it appears they have multiplied. But more importantly there is the issue of policy which is in quite a mess.  There was a signal that the main policy of PEPP bond purchases would be tapered and we were pointed towards its end date of March next year. Personally I do not believe they can stop QE as last time it lasted for only about 9 months. But some believed it with the optimistic economic forecasts.

Sadly back in the real world things are looking much more awkward with the Australian Financial Review suggesting this earlier.

The Reserve Bank will likely backflip on scaling back its $237 billion bond buying stimulus and could lift weekly purchases to $6 billion, according to leading economists including Westpac chief economist Bill Evans.

Reversing that quickly would be quite a record but as Australia has the strength of its commodities to help it, are you thinking what I am thinking? The Euro area does not have that. Will last week’s plans survive until Thursday?

Markets have picked up the pace with the German ten-year going even more negative and passing -0.4% today.

 

 

How does Japan avoid inflation?

It is time again to look across to Nihon or the land of the rising sun. On the one hand it is getting ready to stage the Olympics and on the other there are a rising number of Covid-19 cases. Switching to the economics Japan must be having a wry smile at the various “tapering” debates as it has been there so many times. I stopped counting on the 19th version of QE and that was a while ago now.  They must also be a little bemused if they look south to New Zealand which looks to be planning some interest-rate rises.

Meanwhile the Bank of Japan continues on the same path. On Friday we got its latest announcement and as well as keeping the -0.1% interest-rate we were told this.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

The reason I pint this out is that it has turned into an interest-rate rise of sorts, or to be more specific that 0% target stops Japanese Government Bonds from rallying past that point. This morning it was at 0.01%. This means that it has missed out on the yield falls we have seen elsewhere with the US ten-year falling by around half a point. If we switch to Germany it looked back in late May that its benchmark yield might be on its way to positive territory again is now -0.36% as I type this. This is awkward because you are doing QE because you believe lower yields give the economy a boost but then you stop the yields from falling further. Meanwhile you continue to buy JGBs on a grand scale.

In terms of the money supply the Bank of Japan has been pumping things up.

The year-on-year rate of change in the monetary
base has been positive at around 20 percent, and
its amount outstanding as of end-June was 660
trillion yen, of which the ratio to nominal GDP was
121 percent.21 The year-on-year rate of increase
in the money stock (M2) has been at around 6
percent, mainly reflecting an increase in fiscal
spending and a past rise in bank lending.

But as you can see the impulse fades considerably even before it hits measures which are influenced by the real economy.

Inflation

Many countries are facing an inflation scare with the debate being how long it will last? Not Japan.

The year-on-year rate of change in the CPI (all
items less fresh food) has been at around 0
percent recently due to a rise in energy prices,

You may note that it has taken a rise in energy prices to get things to zero and zero is essentially what we have observed throughout the “lost decade” period. As someone who has a mobile phone contract which rises every year this seems typically Japanese.

a reduction in mobile phone charges.

If we drill deeper into the situation we see something else which is Japanese and here is the Bank of Japan explanation.

In the cases of the United States
and Europe, the output prices indices have
exhibited remarkable increases in tandem with
the escalation of the delivery delay indices.

As we have observed costs have risen and we tend to respond by raising prices but behaviour in Japan is different.

On the other hand, in the case of Japan, although
both the delivery delay index and the output
prices index have increased, the recent degree of
increase for both indices has been limited
compared with that in the United States and
Europe

Why is that?

The relatively small degree of rise in Japan’s
output prices index may be partly attributable to
Japanese firms’ strong tendency, at least in the
short run, to ration their products without raising
their selling prices when faced with excess
demand.

So Japan places the quantity rather than the quality ( I take price as a quality measure) game. Thus they avoid at least some of the second and third order effects of higher prices. Even when things came under what they considered to be real pressure they only saw the sort of level the UK is at now.

In this regard, in the final phase of the rise in
commodity prices in the 2000s, the year-on-year
rate of change in the CPI excluding fresh food
temporarily increased to around 2.5 percent,

Could you imagine the Bank of England ever writing this?

That said, the price change distribution at
that time shows that the rates of increase for a
majority of CPI items stayed at around 0 percent,

So even when you get the below it gets heavily watered down.

and only those for a limited number of items, for
which the raw material ratio is large, saw high
price rises of around 4-6 percent

Or as they put it.

Considering these past experiences, it seems
highly likely that the CPI inflation that merely
reflects upstream cost increases will spread to
other items to only a limited extent, and thus will
be only transitory.

So if anywhere is going to see transitory inflation then as Talking Heads put it.

I Guess that this must be the place

Wage Inflation

This used to be mostly ignored as an issue in economics because wages were assumed to rise faster than prices. That changes years and in this case decades ago as it is a feature of what we call the lost decade. Although the news has yet to reach some of the Ivory Towers.

The year-on-year rate of change in scheduled
cash earnings has been positive to a relatively
large extent on the back of (1) a rebound from the
decline seen last year, (2) rising wages of full-time
employees in the medical, healthcare, and
welfare services industry, which faces a severe
labor shortage, and (3) a fall in the share of part-time employees, mainly due to the adoption
of equal pay for equal work.

We actually have some wages growth at 2% and at first it looks good because with no inflation that is a real wages rise. Except when we look back to May last year we see that real wages fell by 2.3% so in fact we are worse off. We will find out more soon as June and July are months which are significant in bonus terms but as we stand we see that wages have continued to stagnate overall.

I do like the “sooner or later” bit below.

Special cash earnings
(bonuses), which lag behind corporate profits by
about half a year, are likely to stop declining
sooner or later, reflecting improvement in
corporate profits, and continue increasing steadily
thereafter.

Comment

The Japanese experience is really rather different but in a curious development often ends up in the same place as us. They have a system where many of the numbers are 0 as we look at interest-rates and yields, inflation and wages growth. If we look at the overall pattern we see that national GDP has followed not that different a path, although the individual number is better. But they have taken ZIRP and end up with it in other areas.

But the lesson here is that at least part of the inflation issue is behavioural. Care is needed as other parts of the Bank of Japan report look at the impact of the higher price for crude oil. But that is in play and Japan has seem 0% CPI and lower producer price inflation than us. In spite of this.

In foreign exchange markets, the yen has
depreciated somewhat against the U.S. dollar
amid a weaker yen against a wide range of
currencies.

Podcast

Retail Sales in Italy are struggling again

Last night it was a case of Forza Italia after the success in reaching the Euro 2020 ( yes we all know it is 2021) football final. It was an especially ice cold final penalty from Jorginho who is having quite a summer. Sadly the economic news is not hitting such heights.

In May 2021 estimates for seasonally adjusted index of retail trade slightly increased by 0.2% in value terms, likewise volume rose by 0.4% in the month on month series.( Istat)

As you can see retail sales have improved but not by much although if we take a bit more perspective things look a bit better.

In the three months to May 2021 value of sales increased by 3.3% when compared with the previous three month period, while volume was up 3.5%.

Although that more positive view comes with the kicker of an apparent slowing which is rather familiar to followers of the Italian economy. The annual comparison has slowed from the 30% growth of the previous month but of course such figures are very distorted a bit like being in a hall of mirrors at a fun fair.

Year on year, value of retail trade continued its growth, increasing by 13.3% and volume sales grew by
14.1% comparing to May 2020, when non-essential retail stores were partially closed due to pandemic
restrictions.

But we can learn something from this.

Despite the growth, in May 2021 total retail
sales levels for both value and volume were still lower than pre-pandemic levels of February 2020.

The May volume index was at 99 where 2015 was 100. So volumes are below where they were when the index was set and if we look at May 2019 at 99.4 slightly below it. This is rather different to the chart presented because it is for values and not volumes. Italy has had some sales growth since 2015 but in essence the inflation seen takes it away as we convert to volumes. So we are back in “Girlfriend in a coma” territory.

The pattern of changes is similar to elsewhere it is just there is less of it in total.

Looking at the value of sales for non-food products, all sectors witnessed growth apart from Computers and
telecommunications equipment (-4.0%). The largest increase were reported for Clothing (+82.3%) and
Shoes, leather goods and travel items (+59.7%).

National Accounts

At the beginning of the month we learnt that the numbers suggested the situation would be better now.

Gross disposable income of consumer households increased by 1.5% with respect to the previous quarter, while final consumption expenditure decreased by 0.6%. As a consequence, the saving rate was 17.1%, 1.8 percentage points higher than in the last quarter of 2020. In real terms, gross disposalble income of consumer households increased by 0.9%.

So there is money available to be spent.

Whilst we are here we can note that the state has been supporting the economy too.

In the first quarter of 2021 the GG net borrowing to Gdp ratio was 13.1% (10.6% in the same quarter of 2020).

Taxes were 41.6% of GDP but expenditure was 54.8%. This leads us to the national debt which was 155.8% of GDP at the end of 2020 and as of April was 2.68 trillion Euros.

Trade

This is something that at first sight looks a positive highlighted by the most recent data.

In May 2021 the trade balance with non-EU27 countries registered a surplus of 4,767 million euro compared
to the surplus of 4.114 million euro in May 2020; excluding energy, the surplus was equal to 7,681 million
euro, up compared with a 5,201 million euro surplus in May 2020.

The annual comparisons are of course distorted but my initial point is that Italy has run a consistent surplus. We have to go back to April for the full figures including the EU but we remain at this point with what looks like a success economy via its trade surplus.

As ever care is needed because exports have risen since the Euro area crisis but there is a familiar point about under performance here. That is in this instance relative to its peers. But we do see weak internal demand from the pattern of retail sales we looked at earlier and that would feed into imports.

This brings us to one of the debates which is between whether it is good to have a trade surplus or a deficit? The answer mostly comes from the Talking Heads lyric “How did I get here”. A surplus can indicate a competitive economy and there are parts of the Italian economy that deserve that moniker. But in a 2018 paper from the LSE it was suggested that things may have hit trouble there. The emphasis is mine

Importantly, we find evidence that misallocation has increased more in sectors where the world technological frontier has expanded faster when, in the wake of Griffith et al, we measure the speed of technological change in a sector by the average change of R&D intensity in advanced countries. Relative specialisation in those sectors explains why, perhaps surprisingly, misallocation has increased particularly in the regions of Northern Italy, which traditionally are the driving forces of the Italian economy.

In terms of scale the issue was/is very significant.

With these definitions in mind, we study the universe of Italian incorporated companies over the period from 1993 to 2013. We find strong evidence of increased misallocation since 1995 (see Figure 3). If misallocation had remained at its 1995 level, aggregate TFP in 2013 would have been 18% higher than its current level. This would have translated into 1% higher GDP growth per year, which would have helped to close the growth gap with France and Germany.

TFP is their productivity measure or Total Factor Productivity.

Maybe it is linked to this issue.

Comment

The European Commission has just released an upbeat forecast starting with something not often written about Italy’s economy.

Economic activity proved more resilient than expected and increased slightly in the first quarter of this year,
despite stringent containment measures.

They now think this.

Performance data from the manufacturing sector and business and consumer surveys suggest that real GDP growth gained further momentum in the second quarter and should strengthen markedly in the second half of the year. On an annual basis, real GDP growth is expected to reach 5.0% in 2021 and 4.2% in 2022. The forecast for 2021 is significantly higher than in spring.

However one hope seems to be struggling if the retail sales numbers are a guide.

Private consumption is expected to rebound sizeably, helped by improving labour market prospects and the gradual unwinding of accumulated savings.

The overall picture looks very Japanese doesn’t it as we note the national debt, trade surplus and weak domestic demand? That brings us back to the Turning Japanese theme.

The Financial Times is bullish, however.

By April, goods exports were 6 per cent above January 2020 levels — the strongest growth rate of any major eurozone economy, compared with rates of less than 1 per cent in France and Germany. As a result, Italy’s goods trade surplus has surged since the start of the pandemic.

Although it is nice to see Italy outperform for once.

This is helping to ease the economic impact of the pandemic. Italy was the only major eurozone economy to grow in the first quarter of this year. Its output expanded by 0.1 per cent from the previous three months; by contrast, the eurozone as a whole logged a contraction of 0.3 per cent.

The problem for Italy remains that it does not grow much more than that in the good times.

The Reserve Bank of Australia decides to look away from surging house prices

We have an opportunity to take a look at a land which is both down under and a place where beds are burning, at least according to Midnight Oil. This is because the latest central bank to emerge blinking into the spotlight is the Reserve Bank of Australia or RBA. Here is its announcement.

  • retain the April 2024 bond as the bond for the yield target and retain the target of 10 basis points
  • continue purchasing government bonds after the completion of the current bond purchase program in early September. These purchases will be at the rate of $4 billion a week until at least mid November
  • maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent.

Perhaps they thought that announcing the interest-rate decision last would take the focus off it. A curious development in that who expects a change anyway? A sort of equivalent of an itchy collar or guilty conscience I think. Along the way they have reminded us that they also have a 0% interest-rate and I guess most of you have already figured that it of course applies to The Precious.

Exchange Settlement Accounts (ESAs) are the means by which providers of payments services settle obligations that have accrued in the clearing process.

As someone who has spent much of his career in bond markets I rather approve of starting with a bond maturity but what is taking place here is a little odd. This is because as time passes their benchmark of April 2024 is shortening as for example it is now 2 years and 9 months. For example that is below the minimum term that the Bank of England will buy ( 3 years) and also central banks have in general been lengthening the terms of their QE buying arguing that such a move increases the impact.

If you think the above is an implicit way of cutting QE there is then the issue that it has been extended until November although with around a 20% reduction in the rate of purchases. That is similar to the Bank of England.

As ever they think they can get away with contradicting themselves because the economy needs help apparently.

These measures will provide the continuing monetary support that the economy needs as it transitions from the recovery phase to the expansion phase.

But only a couple of sentences later it is apparently going great guns.

The economic recovery in Australia is stronger than earlier expected and is forecast to continue. The outlook for investment has improved and household and business balance sheets are generally in good shape.

So do all states of the economy require support these days?

The Economy

The latter vibe continues as we note this.

National income is also being supported by the high prices for commodity exports.

That boost may well carry on if the analysis in The Conversation turns out to be accurate.

The panel expects actual living standards to be higher than the bald economic growth figures suggest.

This is because high iron ore prices boost Australians’ buying power (by boosting the Australian dollar) and boost company profits in a way that isn’t fully reflected in gross domestic product.

In recent months, the spot iron ore price has been at a record US$200 a tonne, a high the budget assumes will collapse to near US$63 by April next year as supply held up in Brazil comes back online.

The panel is expecting the iron ore price to stay high for longer than the Treasury — for at least 18 months, ending this year near a still-high US$158 a tonne.

So a windfall for Australia although they have omitted the “Dutch Disease” issue where the higher Aussie Dollar they mention deters other sectors of the economy such as manufacturing.

Another signal is going well according to the RBA.

The labour market has continued to recover faster than expected. The unemployment rate declined further to 5.1 per cent in May and more Australians have jobs than before the pandemic.

There may even be hope for some wages growth.

Job vacancies are high and more firms are reporting shortages of labour, particularly in areas affected by the closure of Australia’s international borders.

Although later it appears to think it will take quite some time.

The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

House Prices

The situation is in rude health from a central banking perspective.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.

Well if you will pump it up as we note that “investors” are on the case.

The final draw-downs under the Term Funding Facility were made in late June. In total, $188 billion has been drawn down under this facility, which has contributed to the Australian banking system being highly liquid. Given that the facility is providing low-cost fixed-rate funding for 3 years, it will continue to support low borrowing costs until mid 2024.

This is a type of copy cat central banking where the RBA has copied the policy which has juiced the UK housing market. Looking at the credit data there is a lot of investor activity as total mortgage credit for that category was 669 billion Dollars at the end of May as opposed to 1.258 trillion for owner-occupiers.

Anyway here is the consequence.

CoreLogic’s monthly home price index rose 1.9 per cent in June, led by 3 per cent growth in Hobart and 2.6 per cent in Sydney.

The index rose 13.5 per cent over the past financial year just ended, with Darwin (+21pc), Hobart (+19.6pc), Canberra (+18.1pc) and regional markets (+17.7pc) leading the way.

That is the strongest annual rate of growth recorded by CoreLogic nationally since April 2004.

Inflation

Switching to the supposed target then things are in hand as long as you ignore the above.

In the central scenario, inflation in underlying terms is expected to be 1½ per cent over 2021 and 2 per cent by mid 2023. In the short term, CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter because of the reversal of some COVID-19-related price reductions a year ago.

Comment

There are quite a few familar themes here as we note that even recoveries these days need support rather than the old standard of taking away the punch bowl just before the party gets really started. I think we can safely say that the housing  market has the volume turned up if not to 11 very high. This means that for central bank action we return to the prophetic words of Glenn Frey and Don Henley of The Eagles.

“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “

There is an Australian spin in the way that all roads here seem to lead to 2024. Is that a type of release valve? It looks like that at first but there is a catch. We have seen that central banks may reduce the rate at which they buy bonds under QE but they never reverse it. The one main effort by the US Federal Reserve was followed by it buying ever more. In the end central banking roads have so far ended at this destination.

Come on let’s twist again,
Like we did last summer!
Yeaaah, let’s twist again,
Like we did last year! ( Chubby Checker )

Euro area house prices surge to new records

The European Central Bank ( ECB) finds itself between something of a rock and a hard place at the moment. For a while things were relatively easy as it eased monetary policy and went with the flow. But due to the nature of the Euro area economy it has found the phases of reversing course and tightening policy more difficult. If we look back as far as 2010/11 there were the two interest-rate increases which then collided with the Euro area crisis. More recently we saw the end of the QE programme at the end of 2018 which only lasted until the autumn of 2019 when Mario Draghi restarted it as a leaving present to his replacement Christine Lagarde. In itself that was an issue as he was effectively setting monetary policy for her first year or so allowing her to gain an understanding of her newr ole. That plan however was torpedoed by the Covid-19 pandemic,

Now the ECB looks across the Atlantic as the US Federal Reserve tries to negotiate a change of emphasis whilst facing its own problems. President Lagarde found herself under fire on a familiar issue on Monday in the European Parliament.

Christine Lagarde, the ECB’s president, was questioned about the risks in the housing market at a hearing in the European Parliament on Monday.
“Young people and middle-class families are forced to participate in a rat race, overpaying in an overheated housing market,” said Michiel Hoogeveen, a Eurosceptic Dutch MEP. “This is one of the consequences of your generous money creation and low interest policies to keep weaker eurozone countries afloat.” ( Financial Times )

It is typical FT to add the “Eurosceptic” moniker as everyone faces the same house prices. Yesterday in fact brought us up to date on the state of play in the Netherlands.

Dutch House Price Boom

In May 2021, owner-occupied dwellings (excluding new constructions) were on average 12.9 percent more expensive than in the same month last year, representing the largest increase since May 2001.  ( Statistics Netherlands)

This has created a new record high although as you can see that is tucked away a bit.

House prices reached a low in June 2013; they have followed an upward trend since then, reaching a new record level in May 2021. Compared to the low in June 2013, house prices were 66.8 percent higher on average in May.

The June 2013 low is revealing because we see that date as being a pretty consistent turning point for many housing markets around the world. But returning to the Netherlands we see that house price growth has been over 5% for several years now. That is awkward for ECB apologists because it acted to pump things up when prices were already really rather heated. Indeed if we look at the timing of ECB action this is rather revealing from the Dutch statisticians.

 The price rise moderated in 2019 but picked up again in 2020

We could add and accelerated in 2021.

The Lagarde Response

The first response to a problem is invariably a denial and according to the FT that is what we got.

In response, Lagarde said there were “no strong signs of [a] credit-fuelled housing bubble in the euro area as a whole” but she added that there were “residential real estate vulnerabilities” in some countries and some cities in particular.

As you can see she was already trying to protect herself and the next stage in that is to deflect the blame onto someone else.

“The disconnect between housing prices and broader economic developments during the pandemic entails the risk of price corrections,” Lagarde said, calling for macroprudential policies — such as national limits on mortgage lending — to be “designed carefully”.

What has raised house prices?

We see another denial and with house prices rising like they are it is hard not to laugh at the use of “potential side effects”

Lagarde: Negative interest rates have often been criticised because of their potential side effects. Our assessment continues to be positive as the benefits continue to outweigh the costs. ( @lagarde)

Just as a reminder the Deposit Rate is at -0.5% and banks can access funding via the TLTROs at -1%, and they have been accessing it.

Decent ECB TLTRO take-up of €110bn (8th such operation, with two more to go). Total TLTRO rising to €2190bn (€2216bn including PELTROs). ( @fwred)

Sorry for the alphabetti spaghetti, but the point here is that we have seen credit easing on a large scale and the UK experience is that the road is paved with denials but it is a road which leads to the housing market.

Then there is all the QE bond buying with an extra 1.85 trillion Euros ( PEPP) added to the pre-existing 20 billion a month.

The ECB view

It was no surprise to see a report on this issue but even the ECB cannot avoid stating this.

 Year-on-year house price growth increased from 4.3% at the end of 2019 to stand at 5.8% in the last quarter of 2020 – the highest growth rate since mid-2007.

They have a good go at hiding it by translating it into central banker speak though.

Aggregate euro area house price dynamics have remained robust during the coronavirus (COVID-19) pandemic.

The first tactic is to point the blame at some thereby excluding others.

Germany, France and the Netherlands accounted for around 73% of the total increase in the last quarter of 2020 (Chart A), which is more than their weight in the overall house price index.

For the more thoughtful there is the clear implication that ECB policy is not one size fits all as they are effectively telling us policy has been too loose for Germany.

In the case of Germany, the positive contribution to euro area house prices started in mid-2010, also reflecting some catching up after a period of subdued house price developments.

But whatever the intellectual twists and turns they cannot avoid eventually agreeing with me.

Third, loans for house purchase continued to grow in 2020 and financing conditions remained favourable, with the composite lending rate for house purchase at an all-time low of 1.3% at the end of 2020.

Note they place it third though! After all the author Moreno Roma has a career to think of.

The hext effort to divide and conquer hits an inconvenient reality.

The recent resilience of the housing market appears to be broad-based and not limited to capital cities.

Also the trend seen in the UK of a move towards the country may also be in play although so far the numbers are low.

According to ECB estimates, in the course of 2020, euro area house prices in selected capital cities increased 0.7 percentage points less, year on year, than the euro area aggregate……. The observed rise in house prices outside capital cities may also reflect a preference shift associated with increased possibilities for working from home.

Comment

There is quite a bit to consider here and the ECB will have been doing this at its retreat in the hills near Frankfurt last weekend. We have looked at a signal of inflation today and it is not the only one. Let me hand you over to the Markit PMI report from this morning.

Average prices charged for goods and services
meanwhile rose at by far the fastest pace since
comparable data for both sectors were first
available in 2002, with prices rising in each sector
at rates not exceeded for approximately two
decades.

Inflation is on the march above and below we are told more is on the way.

Average input prices rose at a rate exceeded only
once (in September 2000) over the 23-year survey
history. A record increase in manufacturers’
material prices was accompanied by the steepest
increase in service sector costs since July 2008,
the latter reflecting widespread reports of higher
supplier prices, increased fuel and transport costs
plus rising wage pressures.

Some might think this is a clear signal of what to do next for an inflation targeting central bank which is supposed to look around a couple of years ahead. But instead we get this.

Lagarde: Inflation has picked up over recent months in the euro area, largely owing to temporary factors, including strong increases in energy prices. Headline inflation is likely to increase further towards the autumn, continuing to reflect temporary factors.

If we return to the subject of including owner-occupied housing in the inflation measure it is quite a hole. I still recall ECB chief economist Lane telling us up to a third of expenditure went on an area ignored by the inflation numbers. But caution is the watch word because as recently as 2018 the ECB abandoned the plans to do so after wasting a couple of years or so of those of us following its progress.

Was the Fed a case of Much Ado About Nothing?

We have become used to central banking being a bit dull, certainly compared to March last year. They essentially opened the monetary taps and have spent the intervening period not doing much. We have had some fiddling at the edges and a lot of open mouth operations, but last night the stakes were higher because of the pace of the recovery in the US economy. If we move to the effect we can see that markets made an immediate response.

After FED meetings, gold fell down significantly in the last Newyork session, from $1860/oz to $1800/oz, then went up back to $1820/oz ( @fxstreet)

So Gold was hit immediately and the futures contract is at US $1810 this morning meaning that $50 was knocked off its price. So it has been a bad 24 hours for Gold bugs and places were it is held such as India. This gives us our first hint of some news about interest-rates.

Hollar Dollar

Investing.com gives us the picture.

At 3:15 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was traded 0.2% higher at 91.418, after surging nearly 1% overnight, its biggest rise since March of last year.

The rally meant that we have seen some big figure changes with the Euro pushed below 1.20 and the UK Pound £ pushed below $1.40. They should not matter but often do. Also there was some relief for the Bank of Japan as the Yen weakened to 110.60 as it continued a weaker run for the Yen since the days it ended up being pinned around 104.

Bond Markets

Having established a theme of financial markets responding to something about interest-rates we now move to one which gives a qualified response. What I mean by that is yes we get some confirmation from a 0.07% rise to 1.56% for the US ten-year yield but it is not a large move. Also bond yields had been falling for the last couple of weeks so net we are still lower.

The Federal Reserve

The initial statement only gave is a couple of hints.

 Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.

So some confirmation of an improvement and we also got the beginnings of covering their backside on inflation via the use of “largely”

Inflation has risen, largely reflecting transitory factors

But neither of those explain the market response. Nor does the interest-rate change which was announced.

The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 0.15 percent, effective June 17, 2021.

The 0.05% move was also applied to the troubled reverse repo market which went from 0% to 0.05% and we see why from this.

53 COUNTERPARTIES TAKE $520.9 BLN AT FED’S FIXED-RATE REVERSE REPO. ( @FinancialJuice)

We have looked at this several times before where the monetary push from the Federal Reserve has been added to by the fiscal stimulus and the cheques in particular leaving the banking system awash with cash. The pressure has been such there has been a danger of negative interest-rates spreading ( we have seen some in US Treasury Bills). I know it is an irony but the Fed is now acting to stop further falls in interest-rates. Or as Stevie V put it.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, ooh

The US Treasury has been asleep here as it could have helped by issuing some more bonds, it is not as if it will not have deficits to finance.

Projections

More meat came here.

However, the jolt came when new projections saw 11 of 18 central bank policy makers plan for two interest rate increases of 25 basis points in 2023, a year earlier than expected, and a sharp change from the previous meeting when none of these officials were looking for hikes during that year.  ( Investing.com)

Such was the shift that the projection had a 0.6% expectation for interest-rates in 2023 or two 0.25% hikes from the present 0.1%. This led to this perception.

“With the world’s so-called ‘smartest market’ expecting a quicker and more aggressive liftoff in interest rates, the fallout from this Fed meeting could continue to drive all markets in the days and weeks to come,” said Matthew Weller, Global Head of Market Research at GAIN Capital. ( Investing.com)

I have no idea how he could consider that to be aggressive but each to their own. As to the meaning of the shift well I well leave that to Chair Powell.

FED Chair Powell: Not Appropriate To Lay Out Numbers That Mean Substantial Further Progress

Dots Are Not A Great Forecaster Of Future Rate Moves

– Didn’t Discuss If Liftoff Appropriate In Particular Year  (@LiveSquawk )

This is a bit awkward because having sent a signal about higher interest-rates you then say that it does not mean much. Ironically he is of course correct with the statement that central bankers are not great forecasters of future rate moves, and he has thus just torpedoed the “Forward Guidance” claims that have been pressed over the past few years. It gets more awkward as we note they have predicted a “Liftoff” in 2023 but didn’t discuss it. What did they discuss then?

If we return to the dot plot then we see this from Chair Powell back in March 2019.

Each participant’s dots reflect that participant’s view of the policy that would be appropriate in the scenario that he or she sees as most likely.

That could be from Sir Humphrey Appleby in Yes Minister.

Taper Talk 

Essentially it remains that because there is no change.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

Comment

In some ways this echoes the much ado about nothing line from William Shakespeare. The Fed has sent a signal with its forecasts but it is hard not to smile at reports it is being hawkish, especially when CPI inflation is at 5%. Also raising interest-rates in 2023 is an inversion of monetary policy leads and lags with inflation higher now. If it is transitory then why bother? Indeed I could go further because in its forecasts is the assumption that the “normal” level of interest-rates is now 2.5%, does anyone actually believe that? None of this deals with house price rises in double-digits.

The Tapering of QE is an issue where some will keep talking about it and claim to be right should it happen forgetting the failed lottery tickets they previously bought. But my view is that the central banks are all hoping someone else will move first. I know that the Bank of Canada has acted but having bought around 40% of the market in short order it soon would have been out of road anyway.

So we are left with markets and if they have pushed the US Dollar upwards and it persists then they may have achieved something. Although did they intend to? Also we have the nuance which is do we have a clear cause and effect or were markets waiting for a trigger and without the Fed something else would have come along?

Also we saw a bit of insurance taken out against the future.

The Federal Reserve on Wednesday announced the extension of its temporary U.S. dollar liquidity swap lines with nine central banks through December 31, 2021

So they can use the word temporary…….

 

 

 

The long and great depression affecting Greece

Later today we get the policy announcement from the ECB or European Central Bank but I am not expecting much if anything. Perhaps some fiddling with the monthly purchases of the emergency component ( called PEPP) of its QE bond buying scheme. They have been buying around 80 billion Euros a month. But no big deal. So let us look at a strategic issue for the ECB and one which has its fingerprints all over it. We get a perspective from this.

If anyone had doubts about why I keep calling it a great depression the graph explains it. In the west we had got used to economic growth but Greece has replaced that not only with a lost decade but a substantial decline over 14 years. Back in 2007 people might reasonably have expected growth and indeed we have kept receiving official Euro area projections of annual growth of 2% per annum. Including one which (in)gloriously metamorphosed into a 10% decline. Along the way we get a reminder that economic output in Greece is far from even throughout the year.

It is intriguing that Yanis has chosen nominal rather than real GDP for his graph of events. Perhaps it flatters his period in office. If he replies to me asking about that I will post it. But it does open a door because it does provide a comparison with the debt load as most of it ( Greece does have some inflation -linked bonds) is a nominal amount. Of course Greece does not have control over its own currency as it lost that by joining the Euro. Along the way it has seen its debt soar as its ability to repay it has reduced.

National Debt

According to the Greek Debt Office this was 374 billion Euros for central government at the end of 2020 or up some 18 billion. It was more like 150 billion when this century began and really lifted off as a combination of the credit crunch and then the Euro area crisis hit. In 2012 some 107 billion Euros or so was lopped off by the Private Sector Involvement. or haircut although in a familiar pattern debt according to the official body only fell by around 50 billion. The ECB was involved here as it essentially was willing for anyone except itself to see a haircut ( regular readers will recall it insisted all bonds were 100% repaid).

This has meant that the debt to GDP ratio has soared, Initially a target of 120% was set mostly to protect Italy and Portugal  but that backfired hence the PSI. Then there was a supposed topping out around 170% but now we are told it ended 2020 at 205.6%.

There is a structural difference in the debt because so much is in what is called the official sector as highlighted below.

The majority (51%) of Greek debt is held by the European Stability Mechanism and this ensures low interest rates and a long repayment period.

Whilst it has exited in terms of flow the IMF is still there and with the various other bodies means the official sector now holds 80% of the stock.

That 80% is both decreasing and increasing. What do I mean? Well Greece is now issuing bonds again and here is this morning’s example.

The reopening of a 10-year bond issue by Greek authorities on Wednesday attracted 26 billion euros in bids and the interest rate of the issue was set 0.92 percent (Mid Swap + 82 basis points), down from an initial 1.0%. (keeptalkinggreece )

The actual issue is some 2.5 billion Euros and for perspective is much cheaper than the US ( ~1.5%) and a bit more expensive than the UK ( ~0.75%). A vein which the Greek Prime Minister is keen to mine.

Another sign of confidence in the Greek recovery and our long-term prospects. Today we issued a 10-year bond with a yield of approximately 0.9%. The country is borrowing at record low interest rates.

If only record low interest-rates were a sign of confidence! In such a world Greece would soon be surging past the US. Meanwhile we can return to the factor I opened with which is the ECB.

When it comes to ECB QE, Greece is different. The ECB has bought €25.7bn in GGBs under the PEPP so far, which is about €24bn in nominal terms, or 32% of eligible debt securities (GGB universe rose by €3bn in May, and by €11bn ytd). So, what happens next? ( @fwred )

As you can see Greece has been issuing new debt but overall the ECB has bought more than it has issued. There are two ironies here as its purchases back in the day were supposed to be a special case and here it is back in the game. Also Greece is not eligible under its ordinary QE programme. Probably for best in technical terms because if it was it would be breaking its issuer limits.

Austerity

This is a really thorny issue because this remains the plan for Greece.

Achieve a primary surplus of 3.5% of GDP over the
medium-term.

That is from the Enhanced Surveillance Report of this month. That is the opposite of the new fiscal policy zeitgeist. Not only is it the opposite of how we started this week ( looking at the US) but even the Euro area has joined the game with its recovery plan and funds. The catch here is that everything is worse than when the policy target above was established.

The Greek economy contracted by 8.2% in 2020,
somewhat less than expected, but still considerably more than the EU as a whole, mainly on
account of the weight of the tourism sector in the economy……Greece’s primary deficit monitored under enhanced surveillance reached 7.5% of GDP
in 2020.

In terms of the deficit more of the same is expected this year and then an improvement.

The authorities’ 2021 Stability Programme
projects the primary deficit to reach 7.2% of GDP in 2021 and 0.3% of GDP in 2022.

Comment

There is a clear contradiction in the economic situation for Greece. The austerity programme which began according to US Treasury Secretary Geithner as a punishment collapsed the economy, By the time the policy changed to “solidarity” all the metrics had declined and the Covid-19 pandemic has seen growth hit again and debt rise.  The debt rise does not matter much these days in terms of debt costs because bond yields are so low and because so much debt is officially owned. The problem comes with any prospect of repayment as the 2030s so not look so far away in such terms now. That brings us back to the theme I established for the debt some years ago, To Infinity! And Beyond!. But for now the Euro area faces a conundrum as the new fiscal opportunism is the opposite of the plan for Greece.

We can find some cheer in the more recent data such as this an hour or so ago.

The seasonally adjusted Overall Industrial Production Index in April 2021 recorded an increase of 4.4% compared with the corresponding index of March 2021……..The Overall Industrial Production Index in April 2021 recorded an increase of 22.5% compared with April 2020.

Although context is provided by this.

The Overall IPI in April 2020 decreased by 10.8% compared with the corresponding index in April 2019

Plenty more quarters like this would be welcome.

The available seasonally adjusted data
indicate that in the 1st quarter of 2021 the Gross Domestic Product (GDP) in volume terms increased by 4.4% in comparison with the 4th quarter of 2020, while in comparison with the 1st quarter of 2020, it decreased by 2.3%.

For a real push tourism would need to return and as we are already in June the season is passing. But let us end on some good cheer and wish both their players good luck in the semi-finals of the French Open tennis.

 

 

Secretary Yellen shifts the fiscal policy goal posts

The weekend just gone brought with it a clear hint of economic policy ahead. It came from the US Treasury Secretary Janet Yellen who is in the process of making something of a transition. Like Mario Draghi in Italy she is making the switch from supposedly independent central banker to politician. Both as they have emerged from their chrysalis have become advocates for fiscal policy but Janet is taking things a step further.

G7 economies have the fiscal space to speed up their recoveries to not only reach pre-COVID levels of GDP but also to support a return to pre-pandemic growth paths. This is why we continue to urge a to shift in our thinking from “let’s not withdraw support too early” to “what more can we do now.” Not just to end the pandemic, but to use fiscal policy to invest in addressing generational issues like climate change and inequality.

She has clearly gone further than this below which we had become used to.

Fiscal policy has an important role to play in responding to crises and supporting the recovery. The IMF projects that the U.S. will be the first G7 economy to return to its pre-pandemic output level. That’s in part due to our rapid vaccine rollout, but also ambitious fiscal support in policies like the American Rescue Plan.

So as well as the fiscal plan to get the US economy going again we can expect “More,More, More” from the Biden administration. Indeed in her replies to the press Secretary Yellen offered the same prescription to everyone else.

And we think that most countries have fiscal space, and have the ability to put in place, fiscal policies that will continue promoting recovery and deal with some of the long-run challenges that all of us face when it comes to climate change and inclusive and sustainable growth, and we urge countries to do that.

This is a challenge to what we were told at the end of last month by the President of the German Bundesbank Jens Weidmann.

“It must be clear to all that we are not putting monetary policy into the service of fiscal policy,” the Bundesbank President said. “It is essential to keep fiscal assistance measures targeted and temporary to reduce the likelihood of conflicts arising between monetary and fiscal policy.”

Indeed Jens then if anything went further here.

Mr Weidmann also cautioned against letting the current high degree of government intervention in the economy become the new normal.

A Worldwide Move

As well as the promises of US action and urges for other developed nations to do the same there was this.

The G7 reiterated our support for a new allocation of IMF Special Drawing Rights to boost global reserves and provide additional liquidity as IMF members confront the crisis. We strongly support the IMF providing clear, tailored guidance to countries on how best to utilize their new SDRs, as well as proposals to increase transparency in and accountability for how SDRs are used.

There is a merging of monetary and fiscal policy here. At the start this is an expansion of the world money supply via an increase in SDRs. But it will quickly become fiscal policy as the IMF spends the funds that have just been raised. Politicians love this sort of thing because it is near to a “free lunch” they will get because there is no-one with any ability to object such as those pesky voters.

We wait to see how much of an increase there will be in this.

So far SDR 204.2 billion (equivalent to about US$293 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis.

The US Treasury has previously suggested this.

To this end, Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries.

As you can see it would be quite an expansion and perhaps at some point they will key us know who needs global reserve assets? Apart from them of course.

Addressing the long-term global need for reserve assets would help support the global recovery from the COVID-19 crisis

Back in the USA

Before we reach the international environment there are a couple of elephants in the room as we note the subject du jour appearing again.

Q: I guess some people would say seeing U.S. inflation where it is, seeing the serious sheer size of the public deficits, not just in your country but around Europe, you’re now saying go even further.

Which got this response.

SECRETARY YELLEN: Well, we have in recent months seen some inflation. And we, at least on a year-over- year basis will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent.

If she is a De La Soul fan then there is some logic to this.

3
That’s the magic number
Yes it is
It’s the magic number

But in reality she is trying to get away with as small a number as she can. Also I am sure you were all waiting for this bit.

But I personally believe that this represents transitory factors.

As everything ends she will be right but we may all be poorer well before then. Also she seems to be doing some cherry-picking.

 without affecting the underlying inflation rate

Like house prices which do not appear in either of the 2 main inflation measures? Ignoring something rising at over 10% per annum and replacing it by something rising at more like 2% helps you tell people inflation is low. The problem comes when they have to actually pay their bills.

In essence Secretary Yellen is saying the US government is targeting this.

Look, we still have over 7 million fewer jobs right now than we had pre-pandemic.

The catch is the assumption that fiscal policy fixes all ills. No doubt some will benefit but if the numbers are a result of structural changes in the economy others may not.

Interest-rates

When interviewed by Bloomberg Secretary Yellen gave a different perspective.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London.

This is an issue we looked at on the 5th of May when Secretary Yellen also seemed to think she still had her old job as head of the Federal Reserve. Actually whilst we did see a shift upwards in bond yields earlier this year they have if anything retraced a little in the last couple of months.

Comment

There is a clear attempt here to open a path to more expansionary fiscal policy outside the US. Whilst it does not get a mention ( with may be very revealing) this is an issue for a fiscal stimulus.

The U.S. monthly international trade deficit increased in March 2021 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $70.5 billion in February (revised) to $74.4 billion in March, as imports increased more than exports.

Expansions elsewhere and hence more demand for US exports would help with this.

The next issue is inflation as we get told that any response will be too late.

And while we’re seeing some inflation, I don’t believe it’s permanent. But we will watch this very carefully. I don’t want to say, “this is mind absolutely made up and closed.” We’ll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary.

It looks as though we will be discussing the fiscal multiplier ( how much bang you get for your buck) quite a bit over the next year or two.

Podcast

 

India expands QE bond buying as Wholesale inflation rises

Today we can look East and catch-up on the state of play in India. The crucial message from the Reserve Bank of India or RBI earlier was this.

Taking these factors into consideration, real GDP growth is now projected at 9.5 per cent in 2021-22, consisting of 18.5 per cent in Q1; 7.9 per cent in Q2; 7.2 per cent in Q3; and 6.6 per cent in Q4:2021-22

This is a 1% downgrade as previously it was guiding towards 10.5% as the economic growth rate for the year. The rationale for this is the problems with the pandemic.

Turning to the growth outlook, rural demand remains strong and the expected normal monsoon bodes well for sustaining its buoyancy, going forward. The increased spread of COVID-19 infections in rural areas, however, poses downside risks. Urban demand has been dented by the second wave, but adoption of new COVID-compatible occupational models by businesses for an appropriate working environment may cushion the hit to economic activity, especially in manufacturing and services sectors that are not contact intensive.

This means that India is slowing down as other economies expect to pick-up. Also for once the weather is not taking the blame.

 On June 1, the India Meteorological Department (IMD) has forecast a normal south-west monsoon, with rainfall at 101 per cent of the long period average (LPA). This augurs well for agriculture.

Policy Response

For now interest-rate cuts seem to be out of favour.

keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent.

The RBI is not restricted by 0% in the way that many other central banks now are but we find that policy action is now seen what we used to call the unconventional sector.

Taking these developments into account, it has now been decided that another operation under G-SAP 1.0 for purchase of G-Secs of ₹40,000 crore will be conducted on June 17, 2021. Of this, ₹10,000 crore would constitute purchase of state development loans (SDLs). It has also been decided to undertake G-SAP 2.0 in Q2:2021-22 and conduct secondary market purchase operations of ₹1.20 lakh crore to support the market. The specific dates and securities under G-SAP 2.0 operations will be indicated separately.

So we will see another 1.2 trillion Rupees of QE which is a 20% increase on the first quarter of the financial year. Looking at the number below we see that if this continues it looks set to be around a fifth of issuance.

It has facilitated the successful completion of central and state government borrowing programmes of close to ₹22.0 lakh crore at record low costs with elongated maturity during 2020-21.

Also the RBI is indulging in some credit easing.

In order to mitigate the adverse impact of the second wave of the pandemic on certain contact-intensive sectors, a separate liquidity window of ₹15,000 crores is being opened till March 31, 2022 with tenors of up to three years at the repo rate.

Although it is for a particular and in central banking terms unusual sector.

Under the scheme, banks can provide fresh lending support to hotels and restaurants; tourism – travel agents, tour operators and adventure/heritage facilities; aviation ancillary services – ground handling and supply chain; and other services that include private bus operators, car repair services, rent-a-car service providers, event/conference organizers, spa clinics, and beauty parlours/saloons.

So we have interest-rates kept at a record low, more QE and credit easing.

Inflation

This is a more difficult area for the RBI which must have heaved a sigh of relief when it saw the monsoon forecast. There are the generic issues we have been looking at elsewhere such as higher oil and commodity prices which will also impact on India. So they will have welcomed this news.

Headline inflation registered a moderation to 4.3 per cent in April from 5.5 per cent in March, largely on favourable base effects. Food inflation fell to 2.7 per cent in April from 5.2 per cent in March, with prices of cereals, vegetables and sugar continuing to decline on a y-o-y basis. While fuel inflation surged, core (CPI excluding food and fuel) inflation moderated in April across most sub-groups barring housing and health, mainly due to base effects.

But the problem is whether this is credible?

Taking into consideration all these factors, CPI inflation is projected at 5.1 per cent during 2021-22: 5.2 per cent in Q1; 5.4 per cent in Q2; 4.7 per cent in Q3; and 5.3 per cent in Q4:2021-22; with risks broadly balanced.

For example if we look further along the inflation chain we see this.

In April, 2021 (over April, 2020) , the annual rate of inflation (YoY), based on monthly WPI,
stood at 10.49% (Provisional) . The annual rate of inflation in April 2021 is high primarily because of
rise in prices of crude petroleum, mineral oils viz petrol, diesel etc, and manufactured products as
compared the corresponding month of the previous year.

There was quite a push on a monthly basis.

The monthly rate of inflation, based on month over month movement of WPI index, in April
2021 stood at 1.86% (Provisional) as compared to March 2021

I am sure that some in India will also be thinking of this from the United Nations yesterday.

The FAO Food Price Index (FFPI) averaged 127.1 points in May 2021, 5.8 points (4.8 percent) higher than in April and as much as 36.1 points (39.7 percent) above the same period last year.

As you can see there has been quite a surge in food inflation which will be a really big deal for India’s many poor.

The May increase represented the biggest month-on-month gain since October 2010. It also marked the twelfth consecutive monthly rise in the value of the FFPI to its highest value since September 2011, bringing the Index only 7.6 percent below its peak value of 137.6 points registered in February 2011. The sharp increase in May reflected a surge in prices for oils, sugar and cereals along with firmer meat and dairy prices.

It does not do an onion index to give us a specifically Indian flavour but as Glenn Frey pointed out the heat is on.

Rupee

The Rupee has been mostly quiet compared to other periods we have looked at and is at 73 versus the US Dollar. Perhaps it is being boosted by this from Shortpedia.

According to #RBI data, India’s foreign exchange reserves surged by $2.865 billion to a record high of $592.894 billion for the week ended May 21.

Comment

There are various contexts here. If we look at the traditional store of value for Indians which is Gold it has seemingly found the air too thin above US $1900 and has fallen to $1873 as I type this. So one Rupee alternative has disappointed over the past year as you might reasonably have expected more than an 8% return. More recently Bitcoin has also struggled so these may be factors helping the Rupee.

Looking at QE we see the RBI expanding its programme as others are talking about reductions, Indeed it mat have been minor but this from the US Federal Reserve on Wednesday was a type of QT.

The Federal Reserve Bank of New York today announced that the Secondary Market Corporate Credit Facility (SMCCF) will begin gradual sales of its holdings of corporate bond exchange-traded funds (ETFs) on June 7, consistent with plans announced by the Board of Governors to begin winding down the SMCCF portfolio.

This means that should inflation persist the RBI will be left looking like it has missed the boat deliberately like so many of its central banking fraternity.

 

 

Can Mario Draghi reform the economy of Italy?

We have the opportunity today to look at this morning;s positive news for the economy of Italy. So as that is a not that common event let us take it. It has come from the Markit Purchasing Managers Index.

The Composite Output Index* registered 55.7 in May, rising
from 51.2 in April, and signalled the quickest expansion
in Italian private sector output for over three years. At the
sector level, manufacturing growth remained amongst the
strongest on record, while services saw the first upturn since last July.

Care is needed as the PMI is far from an infallible guide but it looks to be showing an improvement, which is welcome indeed. We can cross our fingers and hope that this is also true.

Looking ahead, Italian companies recorded the strongest
ever level of confidence towards output for the coming year.

In terms of the breakdown we can start with this from services.

Moreover, at 53.1, the headline figure pointed to
the strongest growth since March 2019.
Central to the renewed upturn in the sector was the first
increase in new business for three months.

Although the improvement here was all domestic demand.

Gains to demand came solely from domestic markets during May, however, as new export orders continued to decline.

This added to a record improvement in Italy’s manufacturing sector.

posting a fresh series high of 62.3 in May and
signalling the most marked improvement in manufacturing
conditions since the survey began in June 1997.

This has backed up the official surveys from last week.

In May 2021, the consumer confidence index increased from 102.3 to 110.6 thanks to a rise in all its components, but mostly in the future climate and the economic one. In more details, the future climate surged from 109.6 to 122.5, the economic one progressed from 91.6 to 116.2, the personal one grew from 105.9 to 108.7 and, finally, the current one rose from 97.4 to 102.6.

If the official surveys are any guide then construction is going through the roof.

The confidence index in construction went up from 148.5 to 153.9

There is a difference with the Markit surveys as this one shows services improving but not yet returning to outright growth.

Perspective

We were reminded on Monday of the state of play.

In the first quarter of 2021 the seasonally and calendar adjusted, chained volume measure of Gross
Domestic Product (GDP) increased by +0.1 per cent with respect to the previous quarter and decreased by
0.8% in comparison with the first quarter of 2020.

Rather ironically that could easily pass for a normal situation in Italy at least until you look at the time pattern. For example a positive situation like this is unusual.

The carry-over annual GDP growth for 2021 is equal to 2.6%.

In terms of a further context quarterly GDP in 2015 prices was 403 billion Euros as opposed to the 432 billion of the third quarter of 2019. The latter is significant as it was the first time Italy was close to achieving again the levels of the summer of 2011.

Inflation

This was an issue recorded in the PMI surveys as this example from the manufacturing one shows.

Inflationary pressures remained the principal concern
in May, with input costs continuing to surge and firms
raising their average charges to a series record degree as
a result.

Also in services.

As a result, Italian service providers increased their average charges for the first time in nearly two years. Respondents linked the increase to the pass-through of greater input costs to clients.

The Euro area now has consumer inflation at target ( 2%) so looking ahead there may be issues here in terms of ECB policy. Although in isolation Italy has more headroom as its CPI is 1.3%. However it will be feeding more directly into this.

In April 2021, compared with April 2020, industrial producer prices increased by 7.6% in both the euro area and the EU.

Italy saw a 1% increase in March and 1.2% in April so the surveys are picking up increases in addition to this.

Mario Draghi

He has been reviewed in glowing terms by the Financial Times today.

In his eight years as president of the European Central Bank, Mario Draghi developed an almost legendary ability to rein in borrowing costs for eurozone governments. Investors appear to be crediting him with similar powers as Italy’s prime minister, judging from the calm that has descended on the region’s bond markets since he took office in February.

Actually most bond markets have been calm the last 2/3 months after the yield rises that began the year. But it then goes further.

Analysts at Goldman Sachs have dubbed the former ECB chief’s power over bond markets the “Draghi put”. “The pricing of Italian sovereign risk points to confidence in Draghi’s ability to contain political risk,” the bank wrote in a note to clients last week.

The idea of a put option for the Italian bond market surely belongs with the present President of the ECB Christine Lagarde though. For instance the new QE post pandemic QE bond purchasing programme introduced on her watch had bought some 157 billion Euros of Italian bonds as of the end of March. There was also the existing QE programme which bought some 3.2 billion Euros of them in April. Whilst noting the role of Christine Lagarde let me congratulate her on this from last night.

I am deeply grateful to have been awarded the Turgot Prize of Honour by former @ecb   President Jean-Claude Trichet on behalf of @CercleTurgot . I have been privileged to witness Europe’s progress first-hand, and am honoured to be able to continue doing my part. ( @lagarde)

Quite a turn-around from her conviction for negligence in 2016 isn’t it?

Returning to Italy much depends on this.

Investors have signalled their support for the prime minister’s plans to overhaul Italy’s bureaucracy while spending €205bn of EU recovery money.

Italy has gained the largest share of the recovery fund and that is a success for Super Mario.

Some fund managers sense an opportunity to shake Italy out of decades of low-growth torpor.

I have to say that the situation here reminds me of Prime Minister Abe in Japan. Whilst Mario Draghi has not been Prime Minsiter before he has been at the top of the establishment and past reforms have gone wrong. For example the Italian banking sector with all its problems and indeed collapses is governed by what are called the “Draghi Laws”.

They are betting the stability provided by Draghi’s national unity coalition provides an ideal backdrop for the reform programme as Italy deploys one of the largest shares of the EU’s €750bn pandemic recovery fund. The government has established a watchdog to oversee disbursement of the cash, and introduced measures to streamline bureaucracy and speed up infrastructure development.

Comment

Let us wish Mario Draghi well as we hope for an upturn in Italy’s economic fortunes. He has helped with stability for now although at the cost of another Prime Minister being imposed rather than elected. Also he was able to negotiate for Italy’s share of the recovery fund. But deeper questions remain about reform and should there be any then issues like this highlighted by Ansa remain.

ROME, MAY 26 – Italy’s brain drain has risen 41.8% in the last years, the Audit Court said Wednesday.
“Limited job prospects and low pay are pushing ever more graduates to leave the country, with a rise of 41.8% over 2013.” said the court.
Italy like other countries is seeing more and more young people graduating, but is losing more and more of them unlike other countries, the court said.

Demographics in Italy have seen a net rise over past years as Italians have left but more migrants have arrived.

So we find ourselves returning to the Italian conundrum. It has economic strengths such as the manufacturing sector in the north. But that never seems to filter into the rest of the economy leading to the “girlfriend in a coma” theme. Euro membership was hoped to change this whereas it may have made it worse.