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


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.



UK Trade figures are subject to a lot more doubt than we are usually told

Today is a cleat example of the morning after the night before so let me open by congratulating Italy on their victory in the European Championships football last night. However I wish to look back to Friday lunchtime when the UK released some new details on trade some 5 hours after they were supposed to be released. A good day to bury bad news or has the issue of there being rather different numbers on European trade being produced by the UK and EU come to a head?

What were the numbers for May?

They started well as we note a rise in exports.

Total exports of goods, excluding precious metals, increased by £1.3 billion (4.9%) in May 2021, driven by a £1.0 billion (8.0%) increase in exports to EU countries.

The first part is no great surprise as we are looking at a period where economies picked up and the second part of a rise to the EU is hopeful for the post Brexit era. As it happens the other side of the balance sheet was good for the trade balance too.

Total imports of goods, excluding precious metals, fell by £0.5 billion (1.4%) in May 2021 because of a £0.7 billion (3.4%) fall in imports from non-EU countries, which offset a slight increase of £0.1 billion (0.8%) to EU countries.

So we imported less in spite of the economy growing by 0.8% in May and it was a non-EU issue. Indeed by our admittedly poor standards we seem to be in a better run for the trade data.

In the three months to May 2021, the total trade deficit, excluding precious metals, narrowed by £2.2 billion to £3.5 billion.

If we now switch to the Brexit issue we see that there has been a change.

Monthly goods imports from non-EU countries, excluding precious metals, continues to be higher than the EU for the fifth consecutive month, but the gap is narrowing.

But that was it and as someone who has formally asked for more detail on services trade it is hard not to have a wry smile. Because we have ended up with it being nearly the same as the detail on goods trade where we learn very little about either.

In the three months to May 2021, the trade in services surplus fell by £0.2 billion to £28.1 billion.

If you were hoping to find out if it was exports or imports changing I am afraid that was it.

Services Trade

I thought I would scan the data and I return to the issue I raised with the Bean Review. In each of the last 3 sets of 3 months data we have a surplus of around £28 billion. So in a world with the changes we have seen the 3 months to May gives the same answer as the 3 months to February and the 3 months to November 2020. Does anyone actually believe that?

There is one change in that services trade has fallen compared to the peaks in 2019 with exports some £15 billion per quarter lower and imports £18 billion lower.

Why did we get so little May data?

This was singing along with Lyndsey Buckingham.

I think I’m in trouble
I think I’m in trouble

Here are the details and nice effort to blame HMRC ( the tax body).

We identified an error in the UK trade data prior to the planned release on 9 July 2021. The error occurred as we opened up the 2020 year to take on board corrections to HMRC data for non-EU trade which has caused a processing issue for the EU data.

With all the debate over Brexit it was in fact trade outside of it which saw the big move with exports in 2020 revised down by £4.5 billion.

Ironically the numbers improved the view of post full Brexit trade. The moves were more minor but January and February saw a downwards imports revision of £500 million. Then March and April saw an upwards revision of £600 million to exports.

Oh and the HMRC changes were published on the 29th of June so in plenty of time…

Brexit Trade Number Crunching

Regular readers will be aware that some time back I looked at the figures for trade between the US and China. The problem was that you git rather different answers depending on whose figures you looked at. This has been repeated in 2021 as we look for signs as to what a full Brexit has done to UK trade with the EU. Here is the Office for National Statistics.

We have been exploring several possible reasons for the growing disparities between EU and UK trade statistics.

So what is it?

A key reason for the differences we have found is that Trade statistics for imports can be reported on a country of dispatch and country of origin basis. Whereas for exports only country of destination is recorded.

Seems a bit odd that you would count exports and imports differently. So who does what?

For the UK, our main publications for trade statistics shows imports based on country of dispatch and exports on country of destination. This is both for EU and non-EU trade.
The European Union and its Member States will record the country of dispatch and country of origin for non-EU import but will publish their non-EU imports trade based on country of origin.

The finger is pointed at Eurostat as this pre Brexit.

Eurostat statistics record this transaction as £200 imports from UK to NL.

Now becomes this for the same transaction.

Eurostat statistics record this transaction as £200 imports from China to NL.

What does this mean in terms of numbers? Well this was the state of play.

 Just looking at 2020 as an example, the difference between the ONS and Eurostat non-seasonally adjusted datasets were as little as under £100 million in some months, while reaching around £1.5 billion in others.

Which has been replaced by this.

Revisiting the differences now between the UK and Eurostat non-seasonally adjusted datasets, the divergences are much larger, up to £2.7 billion in some months

The areas especially affected are these.

The commodities driving this increased divergence are ‘machinery & transport equipment’ and ‘miscellaneous manufactures’. While a large volume of goods for these commodities, for example cars being finished, pass through the UK, the importing European country receiving the finished good will report country of origin and not country of dispatch.


This has been a humbling period for official economic statistics. Indeed with the way the the Markit PMIs have got manufacturing so wrong recently we can widen the troubled list. Trade figures have long been amongst the worst and I recall the UK version losing their National Statistics status back in 2014.

This adds to the fact that there has been trouble elsewhere like in the Labour Force Survey.

In addition, a change to the non-response bias means that we appear to have a poorer response from some subsets of the population, in particular those with a non-UK country of birth.

which means this.

Another a distinct but related issue was the fact that the population estimates that feed into published the LFS statistics predate the pandemic, and so do not show its demographic and structural impacts.

Which reminds me of this problem.

Our latest data, using information from the Annual Population Survey (APS), shows that in mid-2020 there were around 3.5 million EU citizens living in the UK, a lot smaller than the 6 million applications for the EU Settlement Scheme.

Are there 6 million? No I do not think so but the 3.5 million is probably wrong too.


What are lower bond yields telling us?

A major story in 2021 so far has been the moves in bond yields. This matters because they have become more significant in economic terms during the credit crunch. A factor in this is the way that the ZIRP era of effectively 0% official interest-rates has pretty much stopped the game there for now. For example the US Federal Reserve is presently trying to stop more US rates going below zero. Even the European Central Bank which has applied negative interest-rates for some years now thinks it is at its limit as we learn from the denial below.


Putting it another way their last move was a paltry 0.1% cut to -0.5% although of course they sneaked in a -1% for the banks.

If we step back and ask why?The answer comes from the early days of the credit crunch when official interest-rates were slashed but economies did not respond as the central bankers hoped they would. In effect they thought they had more economic power than they did as longer-term interest-rates cocked something of a snook at them. So we got QE bond purchases in an attempt to control them as well, but whilst this has been associated with lower bond yields the link has been far from what you might think.

Last Night

Whilst many of us in the UK had our eyes on Wembley last night the Federal Reserve released the minutes of its most recent meeting.

On net, U.S. financial conditions eased further, led by a decline in Treasury yields.

Remember this was from mid-June and in terms of central banker psychobabble you can explain it like this.

Lower term premiums appeared
to be a significant component of the declines, as reflected by lower implied volatility on longer-term interest rates.

There had also been bad news for those using real yields as a measure.

The median 2021 core personal consumption expenditures (PCE) inflation forecast from the Open Market Desk’s Survey of Primary Dealers jumped nearly 1 percentage point from the previous survey. However, median forecasts for 2022 and 2023 each rose less than 0.1 percent, suggesting expectations for inflationary pressures to subside.

The Federal Reserve is of course desperate to emphasis anything agreeing with its claim that inflation will be transitory. But the problem for those seeing things in real yield terms is that the higher inflation forecasts should lead to higher bond yields and we got lower ones. Oh Well! As Fleetwood Mac would say.

Oh and I did point out earlier that the Federal Reserve is trying to stop short-term rates going below zero.

Amid heightened demand and reduced supply for short term investments, the ON RRP continued to maintain a
floor on overnight rates.


Here things get a little awkward again. Because any reduction in the current rate of purchases ( $80 billion of US Treasury Bonds and $40 billion of Mortgage-Backed Securities a month) should lead to higher bond yields. Except for all the talk it still seems some way away.

In coming meetings, participants agreed to continue assessing the economy’s progress toward the Committee’s goals and to begin to discuss their plans for adjusting the path and composition of asset purchases. In addition, participants reiterated their intention to provide notice well in advance of an announcement to reduce the pace of purchases.

This backs up this from the statement at the time.

The Committee expects
to maintain an accommodative stance of monetary policy until these outcomes are achieved


An exaggeration but there is a point behind it. Highlighted in a way by this from Reuters.

“If we do see a further drop in interest rates, if we do get below that 1.3% level in any kind of meaningful way, that is going to confirm that growth over value has returned and it is not just a head fake,” said Matt Maley, chief market strategist at Miller Tabak.

Actually the US ten-year yield is 1.26% as I type this as we wonder if that is meaningful enough for Mr. Maley? This compares to 1.78% earlier this year as the yield party peaked and 1.6% just after the Federal Reserve meeting and its hints of a couple of interest-rate rises in 2023. So if you have been long bonds well played.

Back to the economic implications and we start with the US government being able to borrow very cheaply again. Related to that is that long bond (30 year ) yield and its impact on mortgage rates.

Mortgage rates have fallen fairly consistently over the past 2.5 weeks with the past 2 days seeing some of the better improvements…….

They have the 30-year at 3.07% with Freddie Mac going below 3% to 2.98%. I doubt today’s fall to 1.88% for the long bond is factored in but of course the day is not over and things might change.

The International Effect

We can see one via Yuan Talks.

#China‘s most-traded 10-year #treasury futures extend gains to more than 0.5% to hit the highest since Aug, 2020. The yield on China’s 10-year govt bonds drops by 6.25 bp and break through 3% mark to hit 2.9925%.

If we switch to Europe one of my subjects this week – France- has seen its ten-year yield move to a whisker away from 0% this morning. Germany has a thirty-year of a mere 0.15%.

If we travel to a land down under he get a new sort of insight into QE. This is because the Reserve Bank announced a reduction in the rate of it by around 20% from September. The knee-jerk response saw the ten-year yield rise to 1.48% but only a couple of days later it is 1.3%.

The Global Dunces Cap goes to the Bank of Japan. You may recall that a few months ago Yield Curve Control was all the rage. Maybe even fashionable if an economic concept can be. But by pinning the ten-year yield the Bank of Japan stops it from falling and effectively undertake a sort of reverse Abenomics. So it has only moved within the permitted range from 0.06% to 0.02%. I guess that counts as a big move for JGBs these days.

I suspect that has contributed to today’s rally in the Japanese Yen as it moved through 110 although currencies rarely move for one thing alone.


The pendulum keeps swinging in 2021. Markets tend to overshoot but even that theory is awkward now as we note how large the narrative is versus how small the bond yield moves have been. I have worked through plenty of occasions where a 0.5% move would not be considered much and one comes to mind ( White Wednesday 1992) when it was happening if not in seconds in minutes.

Is this a cunning triumph by the US Federal Reserve as some argue? I do not think so as that is way over emphasising their ability. Putting it another way if so they have just poured petrol on the house price rise fire via the impact on mortgage rates.

Switching to the UK we see the same themes in play. The fifty-year yield is back below 1% so the government can borrow incredibly cheaply just as theory tells us it should be getting a lot more expensive. Also we may see more of this.

Record low rate on a 60% LTV 2yr fix of 1.15% in June. No wonder that mortgage mover numbers and house prices are up. Average quoted rates are falling on higher LTVs but still higher than pre-pandemic. ( @resi_analyst )


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

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.


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.


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.

Where next for the economy of France?

Sometimes we find that one segment of news does fit more than one piece of the economic puzzle. This morning that has come from La Belle France.

In May 2021, output decreased in the manufacturing industry (–0.5%, after –0.1%), as well as in the whole industry (–0.3%, after +0.1%). Compared to February 2020 (the last month before the first general lockdown), output remained in sharp decline in the manufacturing industry (–6.9%), as well as in the whole industry (–5.6%). ( INSEE )

Late spring saw a couple of declines in manufacturing which caught out the forecasters mostly I would imagine because of this.

The easing of COVID-19 lockdown restrictions contributed
to a further strong improvement in business conditions in
the French manufacturing sector during May. Output and
new orders both increased at accelerated rates. ( Markit IHS PMI)

In fact they went further.

The seasonally adjusted IHS Markit France Manufacturing
Purchasing Managers’ Index® (PMI®) – a single-figure
measure of developments in overall business conditions –ticked up to 59.4 in May from 58.9 in April, signalling a further substantial improvement in business conditions in the French manufacturing sector, and one that was the most marked since September 2000.

A reading of the order of 60 is supposed to be up,up and away growth not the contraction that was seen. Just in case it was some sort of quirk they rammed the output point home.

The trend in new orders was matched by that for output, with production increasing at the sharpest pace since January 2018.

Car Production

There was no magic bullet here as the main issue came from an area one should have been expecting after all the reports about chip shortages causing problems for modern vehicles, which use so many of them.

In May, output fell back sharply in the manufacture of transport equipment (–5.4% after –0.8%) due to shortages of raw materials in the automotive industry.

Manufacturing for the transport sector in France peaked in December of last year when it made 94.1 where 2015 equals 100. Since then it has been downhill with a very sharp fall of the order of 10 points in February and now we are at 76.2.

In terms of a breakdown we have this which compares to pre pandemic levels.

It slumped in the manufacture of transport equipment (−29.7%), both in the manufacture of other transport equipment (−30.0%) and in the manufacture of motor vehicles, trailers and semi-trailers (−29.2%).

So it is this sector with a little help from a 13.3% fall in the fuel sector that fas dragged things down. The other areas have done much better with some even managing a little growth.

Compared to February 2020, output declined more moderately in “other manufacturing” (−4.0%) and in the manufacture of machinery and equipment goods (−4.4%). Output was above its February 2020 level in mining and quarrying, energy, water supply (+1.9%) and in the manufacture of food products and beverages (+0.9%).

There have been some wild swings with of course the annual figures looking quite a triumph until you see what they are being compared with.

Over this one-year period, output bounced back sharply in the manufacture of transport equipment (+46.1%), in the manufacture of machinery and equipment goods (+35.4%) and in “other manufacturing” (+30.4%).

Overall Economy

After the above you might like to take the next bit with a pinch of salt as we see what Markit IHS tell us from their latest survey on the French economy.

We’ve witnessed a complete quarter of growth for the first
time since the pandemic began, and the growth
momentum needed to drive a sustained recovery is
likely to build as pent-up demand is released and operating capacities expand.

Bank of France

Its projections are upbeat and tell us this.

After dropping markedly in 2020, French economic activity is experiencing a strong rebound in 2021. Following a start to the year marked by ongoing public health restrictions, the phased lifting of the lockdown and acceleration of the vaccination campaign should allow the economy to recover in earnest in the second half. According to our economic surveys, economic activity started to recoup lost ground in the second quarter, despite the emergence of supply difficulties in certain sectors. It should rebound particularly strongly in the third and fourth quarters, as the gradual easing of the public health restrictions leads to strong household consumption growth.

In terms of specific numbers we get this.

In 2021, GDP is projected to expand by 5¾% in annual average terms (which is higher than the euro area average of 4.6%). It should then grow by 4% in 2022 and by 2% in 2023

Which means this.

Activity should start to exceed pre-Covid levels as of the first quarter of 2022, which is one quarter earlier than foreseen in our March projections.

A lot of this is  the by now familiar idea of the savings that have been built up mostly involuntarily will be spent.

The strong GDP growth should essentially be driven by domestic demand in 2021 and 2022, both from consumption and investment. Household purchasing power was on the whole preserved in 2020, and should start to rise again in 2021 and 2022. Household consumption and investment spending are expected to accelerate further in 2022 thanks to the excess savings accumulated previously.

They are a little more specific here and as they do not say the savings ratio was previously 4-5%.

and the household saving ratio should decline from 22% in the second quarter of 2021 to 17% in the final quarter of the year, and then to below its 2019 level in 2022 and 2023

We can also put this “wave” in terms of Euros.

After reaching EUR 115 billion at the end of 2020, the financial savings excess is expected to rise at a more moderate pace in 2021, thanks to the fall in the household saving ratio , and should peak at up to EUR 180 billion at end-2021.


If we remain in the territory of the Bank of France there are various different stories in play. It tells us this.

Inflation as measured by the Harmonised Index of Consumer Prices (HICP) has risen significantly in recent months, climbing from 0.8% in February 2021 to 1.6% in April 2021.

We can update that to 1.8% in May continuing the upwards move which Isabel Schnabel of the ECB wants more of.

higher inflation prospects need to visibly migrate into the baseline scenario, and be reflected in actual underlying inflation dynamics,

Well it can be found in the Markit survey.

Finally, survey data revealed intensifying price pressures
during June. Cost inflation reached a 17-month high,
linked to greater supplier fees and shortages of inputs. The
combination of strong demand and rising expenses led firms to hike their selling charges in June. Furthermore, the rate of output price inflation was the steepest in almost a decade.

Or if they take a look at the cost of buying a house.

In Q1 2021, the house prices in metropolitan France continued to rise, but slowed down a bit: +1.3% compared to the previous quarter with seasonnally adjusted (s.a.) data, after +2.3% in Q4 2020. Year on year, house prices increased this quarter (+5.5% after +5.8%).


The situation is officially positive backed up by today’s PMI survey. But the official manufacturing data driven by the problems in the transport sector suggest a doubt. To that we can add this.

PARIS, July 4 (Reuters) – Health Minister Olivier Veran on Sunday urged as many French people as possible to get a COVID-19 vaccine, warning that France could be heading for a fourth wave of the epidemic by the end of the month due to the highly transmissible Delta variant.

That would be awkward just after this.

France lifted the last of its major restrictions on Wednesday, allowing unlimited numbers in restaurants, at weddings and most cultural events, despite fast-rising cases of the Delta variant. ( the national news)

So we wait and see what happens next especially in these areas.

and the start of a return to normal in tourism and aeronautics, France’s stronghold export sectors ( Bank of France)


Producer Price Inflation surges in Spain

Some days the economic news just rolls neatly into the current economic debate and this morning is an example of that. If we look at Spain we are told this.

The annual rate of the general Industrial Price Index (IPRI) in the month of May is 15.3%, more than two points above that registered in April and the highest since January

So their version of producer prices is on a bit of a charge and this is repeated in the monthly figures.

In May, the monthly variation rate of the general IPRI is 1.6%.

If we look into the detail we see that this was a major factor.

Energy, whose variation of 2.6% is due to the rise in Oil refining, Production
Of gas; pipeline distribution of gaseous fuels and Production, transportation and
electrical power distribution. The impact of this sector on the general index is 0.824.

So half of the May move is a rise in energy prices and we know that this theme has continued this month as we note that Brent Crude futures are just below US $76 per barrel.

The other factors were.

Intermediate goods, which presents a monthly rate of 2.1% and an effect of 0.601….Non-durable consumer goods, with a rate of 0.6% and an effect of 0.149, caused by the increase in the prices of the Manufacture of vegetable oils and fats and animals.

So we see that energy and intermediate prices are on a bit of a charge but that so far this has not really fed into consumer goods. In terms of a pattern we see that something seems to have changed in November ( up 0.9%) last year and since then we have seen quite an increase overall.

As we will be moving on to consider the implications for the ECB let us note the number it will ask for.

The annual variation rate of the general index without Energy increases more than one and a half points, up to 7.1%, standing more than eight points below that of the general IPRI. This rate is the most since July 1995.

So they lower the number but cannot avoid the general principle of an inflationary push.

Euro area money supply

If we now switch to the money supply we have the ECB trying to pump it up to generate inflation and here are it latest efforts.

Annual growth rate of broad monetary aggregate M3 decreased to 8.4% in May 2021 from 9.2% in April……Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 11.6% in May from 12.3% in April.

This leads to several impressions. Firstly these are high rates of annual growth and next they are slowing. But care if needed with the latter view because the monthly rise in broad money was higher as 65 billion Euros in March and 43 billion in April has been followed by 76 billion in May. It was not narrow money which was virtually the same in May as it was in March after a small dip in April.

The banks are still seeing cash pour in which of course has been a feature of these pandemic times although again the annual numbers show some slowing.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households decreased to 7.9% in May from 8.3% in April, while the annual growth rate of deposits placed by non-financial corporations decreased to 8.9% in May from 12.8% in April. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) increased to 11.4% in May from 8.7% in April.

The actual numbers for deposit increases coincide with this more than the previous ones as we note the increase in overnight deposits has gone 69 billion Euros in March then 45 billion in April, followed by 59 billion in May.


These numbers are hard to interpret right now. This is because they are a lagging indicator of economic activity but got a sharp shove higher in the spring of last year via central bank and government action. However there is one area we can look at from several angles.

The annual growth rate of credit to general government decreased to 15.4% in May from 18.0% in April,

There clearly has been a lot going on here and you will not be surprised to read that there was a clear shift last March. The annual growth rate had been negative for a while signalling a type of austerity but then went positive rising to a peak growth rate of 24% in February. The monthly rate has been falling overall ( 67 billion then 27 then 37 in May) but it is now some 6.1 trillion Euros.

@fwred has been crunching some numbers for the French public debt.

French public debt rose to a new high in Q1, at 118% of GDP

But someone has been buying.

the Eurosystem ( @banquedefrance @ecb ) holds more than 20% of general government debt, returning interest payments to the state eventually. Excluding Eurosystem holdings, French public debt has risen slightly since 2015 and stands at 94% of GDP.

So QE excluded there has not been much change and of course as we observe so often an SPV fixes everything!

 On the upside, the first payout from the European Recovery and Resilience Facility (RRF) should help to ease the deficit. ( Bank of France)

Well until Eurostat makes them include it anyway.

The European Commission has today adopted a positive assessment of France’s recovery and resilience plan. This is an important step towards the EU disbursing €39.4 billion in grants under the Recovery and Resilience Facility (RRF). ( European Commission)


As we have seen today the current central banking challenge is the fact that we are seeing inflation warning signals whilst they are still pumping up the money supply. This provides quite a challenge and reverses past central banking rules. There are various features of this as the ECB like so many central banks funneled cash to the banking sector just before the furlough schemes did exactly the same thing. I note that Isabel Schnabel estimated yesterday that there were 400 billion of excess savings at the end of 2020 so there will be more now. Eventually these will be spent giving the economy another shove at a time of supply issues such as the lack of semiconductors for the motor industry.

There are growing problems with the claims that inflation is low if we return to Spain.

The  Government is  going to approve this Thursday in an   extraordinary Council of Ministers a  lowering of the VAT on electricity from 21 to 10% , as confirmed by sources from  United Podemos  to RTVE in the first instance and sources from Moncloa later.

Also there is the area which escapes the official inflation numbers.


Actually they do not account for it at all but let us give her some credit for at least mentioning the issue.

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.


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

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.

Is this the bond market rally of 2021?

There are various themes waiting for us this morning. One of them is personal as you can take the boy out of the bond markets but perhaps you cannot take the bond markets out of the boy. That links into the move because in themselves bond markets can be dull due to the fact that in essence mathematical changes on prices and yields are hardly exciting in themselves. But the consequences can be and from time to time we get something of note.

(Bloomberg) — Treasury 30-year yields fell below 2% for the first time since February and those on 10-year securities slid under 1.40% as a selloff in equities fueled demand for haven assets.

Thirty-year yields declined as much as nine basis points to 1.93%, and 10-year yields dropped the same amount to a four-month low of 1.35%.

We have a big figure change as the US 30-year went through 2% and as well as the market excitement there are plenty of consequences from this. One sings along with George Benson.

Turn your love around
Don’t you turn me down
I can show you how
Turn your love around

After all bond yields were supposed to be rising with inflation but it has gone to 5% ( IS CPI) and the 30-year is now around 2%. Ooops. We have however seen the return of a past metric for such things if we return to Bloomberg.

 Stocks dropped across Asia with Japan’s Nikkei 225 Stock Average sliding 4%, while the yen strengthened against all its major counterparts.

So the old inverse relationship between equities and bonds which had gone missing seems to be back at least for one day. That will have also woken up The Tokyo Whale as it will have rushed into Japan’s equity market to ship in another 50 billion Yen.

Quantitative Easing

This is and is not the cause. What I mean by that is for all the hype about changes it carries on.

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.

In this sense there are also worldwide influences as the Bank of England will buy another £1.15 billion of UK bonds this afternoon. The ECB continues on the same path albeit with curious weekly fluctuations ( last week the PEPP was only a net 10.8 billion Euros) and its only retreat is this one.

But there is a problem because QE was in motion when bond yields were rising so saying they are a sole cause clearly is not true.

US Bond Market

There has been an influence from this as whilst the US planned to issue more debt in the second quarter of this year and quite a bit more in the third than the first, the structure has changed.

This would make sense if all the borrowing was taking place in bonds, but it isn’t. The huge difference in net issuance in Q2 is down to treasury bills, which don’t impact longer term yield levels. ( @StephenSpratt)

So there was a switch which is friendly to the longer end of the bond market as relatively fewer were issued and more short-term debt replaced it. In isolation that is a curious move because in terms of debt management you make yourself vulnerable of you “go short” because any lack of market enthusiasm for your debt impacts more quickly.

US Treasury

This has also been in play via a couple of factors. This revolves around the cash balances held by the Treasury. These are held by the Federal Reserve for it and as a precautionary move it built them up in response to the Covid-19 pandemic and they peaked at around US $1.8 trillion.

It has been running this down and as of the latest numbers ( June 16th) the Treasury General Account averaged some US $653 billion in the week up to that. This was some US $76 billion lower than the previous week and a whopping US $907 billion lower than this time last year. In itself this is sensible as clearly uncertainty has dropped and the US Treasury does not need to have some much precautionary cash. But the timing decided by Secretary Yellen has meant that the run down will have boosted the bond market. Less debt will be needed to be issued.

The Economy and Fiscal Stimulus

I put these together because they have been operating in the same direction. the economy has been doing well which has added to the points above as the US gets more taxes and spends less. Also the fiscal stimulus plans are not flowing like they might have done.


This is a curiosity to this particular tale because it has turned out to not only be around but also to be higher than many expectations, especially those of the US Federal Reserve. You need not take my word for it as here it is.

“We were expecting a good year, a good reopening, but this is a bigger year than we were expecting, more inflation than we were expecting,” St. Louis Fed President James Bullard told CNBC’s “Squawk Box” Friday. “And I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.”

So having looked at an old relationship that has apparently begun again this one os more problematic. As you have to assume the higher than expected inflation has morphed into expectations of lower inflation ahead. Some markets have taken this literally as various commodities have dipped.

Reverse Repos

These have headed in the opposite direction to today’s theme as we have discussed in the comments section. On Friday the US Fed found itself receiving some US $747 billion of these as a banking system awash with cash looked for somewhere to put it. There is a link to the lower treasury bond issuance we looked at earlier because of more bonds had been issued it may have gone there at least in part.

This may be a case of another type of round tripping. Because cash at the Fed ( US Treasury) has been drawn down and we find that banks via reverse repos are replacing it. Not on the same scale but it is a large amount.


This has been quite an extraordinary move which has gone in the opposite direction to economic growth and inflation. It will have consequences as for example it will give another push to US house prices via the 30-year mortgage rate. That will reverse the recent trend.

The national average 30-year fixed refinance APR is 3.380%, up compared to last week’s of 3.300%.  (

Should that happen then it feels like a time that people should take it. Why? Well we have looked at factors which have boosted the bond market such as the running down of the US Treasury Account which can continue for a bit but will then fade and end.

But for now many countries can continue to borrow very cheaply as for example the 2% for the long-term for the US and my home country the UK can borrow at around 1% ( 1.02%) for fifty-years. So politicians the world around will be pleased.




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.


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

Achieve a primary surplus of 3.5% of GDP over the

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.


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.



Digital Currencies are on their way accompanied by negative interest-rates

The issue of a digital currency is something that is increasingly occupying both the minds and the attention of central bankers. This morning has given another example of that because as I was about to look at a couple of developments this appeared on the news wires.

Hong Kong monetary authority says it will explore issuing an e-HK dollar ( @PriapusIQ )

It would be simpler if we got a list of central banks that are not looking at it! They all have the two main drivers for this. The first is that digital currencies provide a challenged to the banks or as central banks see it “The Precious! The Precious!”. The next is their fear of the consequences of what they call the lower bound for interest-rates. Whilst this has clearly got lower to the embarrassment for example of Governor Carney of the Bank of England who assured us several times it was 0.5% in the UK and then helped to reduce it to 0.1%. There are fears in the central banking community that many have got close to if not at as low as they can go. There is a reason the ECB has not cut its deposit rate below -0.5%. So we move onto their plans for in some cases negative interest-rates in the next recession ( UK) and deeper ones ( Euro area)

Money Money Money

The issue here is the role of banks in the creation of money. Here is the Bank of England explaining this yesterday.

In the modern economy,most money takes the form of bank deposits. The principle way these deposits are created is through commercial banks creating loans.

We see here much of the reason for the central banking view that banks are “The Precious! The Precious!” and it continues.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. For example, when a bank extends a mortgage to someone to buy a house, it does not typically do so by giving them thousands of pounds of bank notes. Instead, it credits their bank account with a bank deposit the size of the mortgage. At that moment money is created.

It is revealing I think that that they choose a mortgage as an example rather than business lending. But the real point here is the vital role of banks in most money creation in our monetary system. It is this that is the real “high powered money” rather than the version in the theories of economics text books which focused on central banks. If that had been right QE would have launched economies forward and we would not be where we are.

Banks are not limited as many think by some rule in the form of a money multiplier. The UK has not had anything like that for some decades. There is a limit from this.

Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system.

Although that has had quite a bit of trouble as banks have in modern times struggled to make much if any profit at all. They have required quite a bit of help and some collapsed quite spectacularly with large losses. Another potential limit is prudential regulation which as I am sure you have spotted ties the banks ever more closely to the central bank.

In some ways the main restriction these days comes from us.

for instance they could quickly “destroy” money by using it to repay their existing debt.

This has been happening in the world of UK unsecured credit as highlighted a few days ago.

Individuals have made significant net repayments of consumer credit since March 2020 (Chart 2). The further net repayment of £0.4 billion in April this year was, however, less than seen on average each month over the previous year (£1.7 billion).

It is rarely put like this but money has been “destroyed”. How very dare they! Won’t anybody think of The Precious?

For a central bank replacing this with Facebook’s currency or one from any of the other tech giants in existence or about to start does not bear thinking about. It may even have been a string factor in the new apparent enthusiasm for taxing them.

Negative Interest-Rates

This is the fantasy world of central bankers thus we find that the road to negative interest-rates is described as one with higher ones.

In response to deposits migrating to new forms of digital money, banks are assumed to compete for deposits. And they do this by offering higher interest rates.

Actually Bank of England policy ( Funding for Lending Scheme and the various Term Funding Scheme’s) has been designed to avoid this for some time. Indeed this has not really happened since our favourite Charlie Professor Sir Charles Bean promised it back in September 2010.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Actually Sir Charles has done really rather well adding the Office of Budget Responsibility and a Professorship at the LSE to his RPI-linked pension. Savers meanwhile have been stuck on the roundabouts.

Returning to its scenario the Bank makes various assumptions which lead us to this.

The interest rate banks pay on long-term wholesale funding is typically higher than on deposit funding. Other things equal, replacing lost deposits with more long-term wholesale funding therefore implies an increase in banks’ overall funding costs.

This leads us to banks charging more which many people will be familiar with. After all banks are perfectly capable of managing that without all the assumptions and intellectual innovation displayed in the discussion paper.

Under this assumption, both funding costs and bank lending rates rise by around 20 basis points.

In fact a 0.2% increase on overdraft rates which these days are 30% plus would hardly be noticed nor on credit cards. Commercial borrowing is something that may act differently mostly I think due to scale.

Under the illustrative scenario, it is assumed that some corporate borrowers find it cheaper to take advantage of credit opportunities in the non-bank sector. For example, medium-sized UK companies who were previously unwilling to accept costs associated with non-bank sources of credit, but who now find it cheaper to do so than borrowing from a bank.


This is another step on the road to ever lower interest-rates combined with central bankers twisting and turning to find a future for the banks. This is because the system as it stands suits them both.

Monetary policy is mainly implemented by setting the interest rate paid on reserves held at the central bank by commercial banks. This interest rate is known as Bank Rate.

Or at least that is their view because as we look around we see that it has in fact become less and less relevant.

Towards the end of the paper – and thus less likely to be reported- we end up at our destination though.

If it was preferred to cash, a central bank digital currency could also soften the lower bound on monetary policy.

Here is the Bank of England version of this.

In principle, a CBDC could be used, in conjunction with a policy of restricting the use of cash. If the interest rate on the CBDC could go negative, this could soften the effective lower bound on interest rates and lower the welfare loss associated with the opportunity cost of holding cash.

Actually you just set an exchange-rate between the two as the IMF suggested and Hey Presto! You have -2% or -3% and a strict form of financial repression.