The Central Banks can enrich themselves and large equity investors but who else?

We are in a period of heavy central bank action with the US Federal Reserve announcement last night as well as the BCB of Brazil and the Bank of England today. We are also in the speeches season for the European Central Bank or ECB. But they have a problem as shown below.

(Reuters) – London-listed shares tracked declines in Asian stock markets on Thursday as the lack of new stimulus measures by the U.S. Federal Reserve left investors disappointed ahead of a Bank of England policy meeting.

Is their main role to have equity markets singing along with Foster The People?

All the other kids with the pumped up kicks
You’d better run, better run, faster than my bullet
All the other kids with the pumped up kicks
You’d better run, better run, outrun my gun

We can continue the theme of central planning for equity markets with this from Governor Kuroda of the Bank of Japan earlier.

BOJ GOV KURODA: ETF PURCHASES ARE NOT TARGETING SPECIFIC STOCK MARKET LEVELS. ( @FinancialJuice )

In fact he has been in full flow.

BOJ’S GOV. KURODA: I DON’T SEE JAPAN’S STOCK MARKET GAINS AS ABNORMAL.  ( @FinancialJuice)

I suppose so would I if I owned some 34 Trillion Yen of it. We also have an official denial that he is aiming at specific levels. He might like to want to stop buying when it falls then. Some will have gained but in general the economic impact has been small and there are a whole litany of issues as highlighted by ETFStream.

Koll says the sheer weight of BoJ involvement is off-putting for others who might wish to get involved in the market. “When I go around the world, (the size of the BoJ’s holdings is) the single biggest push back about Japan from asset allocators,” he says. “This is the flow in the market.”

As the Bank of Japan approaches 80% of the ETF market I am sure that readers can see the problem here. In essence is there a market at all now? Or as ETFStream put it.

So how can the BoJ extricate itself from the ETF market without crashing the stock market?

Also it is kind of theme to back the long-running junkie culture theme of mine.

As it stands, the market has become as hooked as any addict.

You also have to laugh at this although there is an element of gallows humour about it.

The recent slackening off in ETF buying might be an attempt to end this cycle of dependency,

That was from February and let me remind you that so much of the media plugged the reduction line. Right into the biggest expansion of the scheme! As an example another 80 billion Yen was bought this morning to prevent a larger fall in the market. It was the fourth such purchase this month.

The US Federal Reserve

It has boxed itself in with its switched to average ( 2% per annum) inflation targeting and Chair Powell got himself in quite a mess last night.

Projections from individual members also indicated that rates could stay anchored near zero through 2023. All but four members indicated they see zero rates through then. This was the first time the committee forecast its outlook for 2023. ( CNBC )

This bit was inevitable as having set such a target he cannot raise interest-rates for quite some time. Of course, we did not expect any increases anyway and this was hardly a surprise.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. ( Federal Reserve)

So there is no real change but apparently it is this.

Powell, asked if we will get more forward guidance, says today’s update was ‘powerful’, ‘very strong’, ‘durable’ forward guidance. ( @Newsquawk).

He has boxed himself in. He has set interest-rates as his main measure and he cannot raise them for some time and the evidence is that negative interest-rates do not work. So all he can do is the “masterly inaction” of the apocryphal civil servant Sir Humphrey Applebym or nothing. Quite how that is powerful is anyone’s guess.

Brazil

The same illogic was on display at the Banco Central do Brasil last night.

Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to maintain the Selic rate at 2.00% p.a.

They have slashed interest-rates to an extraordinary low level for Brazil and seem to think they are at or near the “lower bound” for them.

The Copom believes that the current economic conditions continue to recommend an unusually strong monetary stimulus but it recognizes that, due to prudential and financial stability reasons, the remaining space for monetary policy stimulus, if it exists, should be small.

But telling people that is a triumph?

To provide the monetary stimulus deemed adequate to meet the inflation target, but maintaining the necessary caution for prudential reasons, the Copom considered adequate to use forward guidance as an additional monetary policy tool.

Seeing as nobody is expecting interest-rate increases telling them there will not be any will achieve precisely nothing. Let’s face it how many will even know about it?

ECB

They too are indulging in some open mouth operations.

ECB’s Rehn: Fed’s New Strategy Will Inevitably Have An Impact On The ECB, “We Are Not Operating In A Vacuum”

Regular readers will recall him from back in the day when he was often telling the Greeks to tighten their belts and that things could only get better. Nobody seems to have told poor Ollie about the last decade.

ECB’s Rehn: There Is A Risk That Inflation Will Continue To Remain Too Low Sees Risk That Euro Zone Will Fall In A Trap Of Slow Growth And Low Inflation For A “Long Time”

So we see more ECB policymakers correcting ECB President Christine Lagarde on the issue of the exchange rate. Also as the news filters around there is this.

Three month Euribor fixes at -0.501% … below the ECB’s deposit rate for the first time! ( StephenSpratt)

He is a little confused as of course this has happened before but whilst it is a very minor move we could see another ECB interest-rate cut. It will not do any good but that has not stopped the before has it?

Bank of England

There is this doing the rounds.

LONDON (Reuters) – The Bank of England is expected to signal on Thursday that it is getting ready to pump yet more stimulus into Britain’s economy as it heads for a jump in unemployment and a possible Brexit shock.

Actually nothing has changed and the Bank of England is at what it has called the lower bound for interest-rates ( 0.1%) and is already doing £4.4 billion of bond buying a week.

Still not everybody is seeing hard times.

Former Bank of England (BoE) governor Mark Carney has joined PIMCO’s global advisory board, which is chaired by former Federal Reserve chairman Ben Bernanke.

Carney, who was appointed UN Special Envoy on climate action and finance in December 2019, is one of seven members of the global advisory board, alongside former UK Prime Minister and Chancellor Gordon Brown, and ex-president of the European Central Bank Jean-Claude Trichet. ( investmentweek.co.uk )

As Dobie Gray put it.

I’m in with the in crowd
I go where the in crowd goes
I’m in with the in crowd
And I know what the in crowd knows

Comment

We have arrived at a situation I have long feared and warned about. The central bankers have grandly pulled their policy levers and now are confused it has not worked. Indeed they have pulled them beyond what they previously thought was the maximum as for example the Bank of England which established a 0.5% interest-rate as a “lower bound” now has one of 0.1%. Now they are trying to claim that keeping interest-rates here will work when the evidence is that they are doing damage in more than a few areas. In terms of economics it was described as a “liquidity trap” and they have jumped into it.

Now they think they can escape by promising action on the inflation rates that as a generic they have been unable to raise since the credit crunch. Here there is an element of “be careful which you wish for” as they have put enormous effort into keeping the prices they can raise ( assets such as bonds,equities and houses) out of the inflation measures. So whilst they can cut interest-rates further and frankly the Bank of England and US Federal Reserve are likely to do so in any further downtown they have the problem highlighted by Newt in the film Aliens.

It wont make any difference.

That is why I opened with a discussion of equity purchases as it is more QE that is the only game in town now. Sooner or later we will see more bond purchases from the US Federal Reserve above the present US $80 billion a month. Then the only move left will be to buy equities. At which point we will have a policy which President Trump would set although of course he may or may not be President by them.

Oh and I have missed out one constant which is this sort of thing.

ECB Banking Supervision allows significant banks to temporarily exclude their holdings of banknotes, coins and central bank deposits from leverage ratio calculations until 27 June 2021. This will increase banks’ leverage ratios.

The Precious! The Precious!

 

 

 

How many central banks will end up buying equities?

Sometimes we can combine one of our themes with the news flow and today is an example of that. We can start with the role of central banks where what was considered extraordinary policy is now ordinary and frankly sometimes mundane. We have seen interest-rate cuts, then QE bond buying, then credit easing and of course negative interest-rates. Overnight even the home of the All Blacks has joined the latter party.

Some New Zealand wholesale rates fell below zero for the first time on Wednesday as investors increased bets on a negative policy rate. Two and three-year swap rates sank to minus 0.005%, as did the yield on the benchmark three-year bond. ( Bloomberg)

So we have negative bond yields somewhere else as the contagion spreads. Whilst it is only marginal the track record so far is that it will sing along with Madonna.

Deeper and deeper, and deeper, and deeper

Bloomberg thinks it is driven by this.

Most economists expect the RBNZ to cut its cash rate from 0.25% to minus 0.25% or minus 0.5% in April next year, and some see the chance of an earlier move.

However they seem to have missed the elephant in the room.

The Monetary Policy Committee agreed to expand the Large Scale Asset Purchase (LSAP) programme up to $100 billion so as to further lower retail interest rates in order to achieve its remit. The eligible assets remain the same and the Official Cash Rate (OCR) is being held at 0.25 percent in accordance with the guidance issued on 16 March. ( Reserve Bank of New Zealand 12 August)

So we are on the road to nowhere except according to Bloomberg it was a triumph in Sweden.

Negative rates were successful in Sweden because they achieved the aim of returning inflation to target without causing any significant distortions in the economy, said Lars Svensson, an economics professor in Stockholm and a former deputy governor at the Riksbank.

Only a few paragraphs later they contradict themselves.

Swedish mortgage rates dropped below 2%, causing house prices to surge to double-digit annual gains, but unemployment fell and the economy grew. Crucially, headline inflation rose steadily from minus 0.4% in mid-2015 to meet the central bank’s 2% target two years later. Inflation expectations also rose.

And again.

The Riksbank sent its policy rate into negative territory in early 2015, reaching a low of minus 0.5% before raising it back to zero late last year.

It worked so well they raised interest-rates in last year’s trade war and they have not deployed them in this pandemic in spite of GDP falling by 8%!

Oh and there is the issue of pensions.

In Sweden, the subzero-regime was advantageous for borrowers but brutal for the country’s pension industry, which struggled to generate the returns needed when bond yields turned negative.

So in summary we arrive at a situation where in fact even the Riksbank of Sweden has gone rogue on the subject of negative interest-rates. Going rogue as a central bank is very serious because they are by nature pack animals and the very idea of independent thought is simply terrifying to them.

Also the Riksbank of Sweden is well within the orbit of the supermassive black hole for negativity which is the European Central Bank or ECB. We learn much I think by the fact that in spite of economic activity being in a depression no-one is expecting an interest-rate cut from the present -0.5%. When we did have some expectations for that it was only to -0.6% so even the believers have lost the faith. This is an important point as whilst the Covid-19 pandemic has hit economies many were slowing anyway.

Policy Shifts

We are seeing central banks start to hint at ch-ch-changes.

Purchases of foreign assets also remain an option.

The Governor of the Bank of England Andrew Bailey has also been on the case and the emphasis is mine.

But one conclusion is that it could be preferable, and consistent with setting monetary conditions
consistent with the inflation target, to seek to ensure there is sufficient headroom for more potent expansion
in central bank balance sheets when needed in the future – to “go big” and “go fast” decisively.

He then went further.

That begs questions about when does the need for headroom become an issue? What are the limits? One
way of looking at these questions is in terms of the stock of assets available for purchase.

He refers to UK Gilts ( bonds) but he is plainly hinting at wider purchases.

Swiss National Bank

This has become something of a hedge fund via its overseas equity purchases. For newer readers this all started with a surge in the Swiss Franc mostly driven by the impact of the unwinding of the “Carry Trade” where investors had borrowed Swiss Francs. The SNB promised “unlimited intervention” before retreating and now as of the end of June had 863.3 billion Swiss Francs of foreign currency assets. It did not want to hold foreign currency on its own so it bought bonds. But it ended up distorting bond markets especially some Euro area ones so it looked for something else to buy. It settled on putting some 20% of its assets in equities.

Much of that went to the US so we see this being reported.

Swiss National Bank is one of the leading tech investors in the world. 28% of SNB’s Equity portfolio is allocated to tech stocks. Swiss CenBank has 17.4mln Apple shares worth $6.3bn or 538k Tesla shares worth $630mln. ( @Schuldenshelder )

So this is a complex journey on which we now note an issue with so-called passive investing. The SNB buys relative to market position but that means if shares have surges you have more of them each time you rebalance. So far with Apple that has been a large success as it has surged above US $2 trillion in market capitalisation as the recent tech falls are minor in comparison.But the 20% fall in Tesla yesterday maybe a sign of problems with this sort of plan. It of course has surged previously but it seems to lack any real business model.

The Tokyo Whale

The Bank of Japan bought another 80.1 billion Yen of Japanese equities earlier today as it made its second such purchase so far this month. As of the end of last month the total was 33,993,587,890,000 Yen. Hence its nickname of The Tokyo Whale.

Quite what good this does ( apart from providing a profit for equity investors) is a moot point? After all the Japanese economy was shrinking again pre pandemic and there was no sign of an end to the lost decades.

Comment

We find ourselves in familiar territory as central bankers proclaim the success of their polices but are always expanding them. If they worked it would not be necessary would it? For example the US Federal Reserve moving to average inflation targeting would not be necessary if all the things they previously told us would work, had. I expect the power grab and central planning to continue as they move further into fiscal policy via the sort of subsidies for banks provided by having a separate interest-rate for banks ( The Precious! The Precious!) like the -1% provided by the ECB. Another version of this sort of thing is to buy equities as they can create money and use it to support the market.

The catch of this is that they support a particular group be it banks or holders of assets. So not only does the promised economic growth always seem to be just around the corner they favour one group ( the rich) over another ( the poor). They have got away with it partly by excluding asset prices from inflation measures, but also partly because people do not fully understand what is taking place. But the direction of travel is easy because as I explained earlier central bankers are pack animals and herd like sheep. They will be along…..

GDP in Japan goes back to 2010 in another lost decade

Today we get to look East to the land of the rising sun or Nihon as we note its latest economic output figures. According to the Japanese owned Financial Times we should look at them like this.

Japan’s GDP decline less severe than US and Europe

Of course as we are looking at a country where the concept of the “Lost Decade” began in 1990 and is now heading into number 4 of them we need to be careful about which period we are looking at.

Japan’s economy shrank by a record 7.8 per cent in the second quarter of 2020 as it outperformed the US and Europe but lagged behind neighbouring South Korea and Taiwan in its response to coronavirus.

Okay so better than us in the West but not as good as its eastern competitors. Also I note that it relies quite a bit on seasonal adjustment when we have just had an economic season unlike any other as without it GDP fell by 9.9%.

Returning to the seasonally adjusted data we see a consequence of being an exporter at a time like this.

A fall in private consumption accounted for 4.8 percentage points of the decline in Japan’s GDP as the state of emergency reduced spending in shops and restaurants, while a large drop in exports accounted for the remaining 3 percentage points.

This is because exports fell by 18.5% with imports barely affected ( -0.5%) so there was a plunge in exports on a scale large enough to reduce GDP by 3%. Actually let me correct the FT here as it was domestic demand which fell by 4.8% with private consumption accounting for 4.5% and investment for 0.2% and the government sector not doing much at all. You may be pleased to read that Imputed Rent had only a minor impact on the quarterly change.

A cautionary note is that Japanese GDP data is particularly prone to revision or as the FT puts it.

Business investment was surprisingly strong, however, and contributed just 0.2 percentage points to the overall decline in output. That figure is often revised in updates to the data, but if confirmed, it would suggest resilience in the underlying economy and potential for a strong rebound.

International Comparison

Regular readers will know that due to the extraordinary move in the UK GDP Deflator ( the inflation measure for this area) of 6.2% in a single quarter our GDP fall may well have been more like 15%. Somehow the FT which is often very enthusiatic about combing through UK data has missed this.

The second-quarter decline in Japan’s GDP was comparable to a 9.5 per cent fall in the US during the same period, or a 10.1 per cent drop in Germany. It was less severe than the drop of more than 20 per cent in the UK, which was late to act but then imposed a severe lockdown. However, Japan did worse than neighbouring South Korea, where output fell 3.3 per cent in the second quarter, or Taiwan, where GDP was down just 0.7 per cent. Both countries managed to control the virus without extensive lockdowns, allowing their economies to function more normally.

It is typical of a Japanese owned publication to trumpet a form of national superiority though.

Japan’s performance relative to other advanced countries highlights how the effectiveness of a country’s coronavirus response affects the economy, with Japan forced to close schools but able to avoid the strict lockdowns used in Europe.

However, only time will tell whether that was more of a tactical than a strategic success.

Japan is suffering an increase in infections, with new cases running at more than 1,000 a day, but it has not imposed a fresh state of emergency.

Let me wish anyone who is ill a speedy recovery.

Context

The initial one is the economic output has now fallen in the last 3 quarters. Following the rise in Consumption Tax from 8% to 10% a decline was expected but now.of course, it looks really badly timed. Although in the period of the Lost Decade there is a bit of a shortage of good times to do such a thing.

Japan has if we look at the seasonally adjusted series gone back the beginning of 2010 and the middle of 2011 which was the same level.It has never achieved the “escape velocity” talked about by former Bank of England Governor Mark Carney.

Bank of Japan

The problem for it is that it was already doing so much or as the Red Queen put it.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

I noted Bloomberg reporting that it owns so 44% of the Japanese Government Bond market these days. Although there is an element of Alice In Wonderland here as via its stimulus programmes the Japanese government will be issuing ever more of them.

In May, the Japanese government approved a second large-scale ¥117tn ($1.1n or 21% of Japan’s GDP) economic rescue package, matching the size of the first stimulus introduced in April. ( OMFIF).

So there will be plenty more to buy so we can expect full employment to be maintained for the bond buyers at the Bank of Japan.

On a gross basis, the government plans to issue close to ¥253tn ($2.3tn) in government bonds and treasury bills in fiscal year 2020 (ending March 2021). This amount combines issues under all three budgetary plans. Excluding refinancing bonds, the net issuance of government bonds is reduced to almost ¥145tn (about 27% of GDP). This includes close to 4% of front-loaded bond issues from future fiscal years and is the largest net issuance in the post-world war II era.

Next there is its role as The Tokyo Whale to consider.

This phase saw the Bank of Japan buy on up as well as down days and the index it looks to match is the Nikkei 400.

There is also the negative interest-rate of -0.1% which I do not think the Bank of Japan has ever been especially keen on which is why it is only -0.1%. After all the years of propping up the banks we can’t have them failing again can we.

The latest move as is so often the case has echoes of the past so let me hand you over to Governor Kuroda.

The first is the Special Program to support corporate financing. The total size of this program is about 120 trillion yen. It consists of purchases of CP and corporate bonds with the upper limit of about 20 trillion yen and the Special Funds-Supplying Operations, which can amount to 100 trillion yen. Through this operation, the Bank provides funds on favorable terms to financial institutions that make loans in response to COVID-19. This operation also includes a scheme in which the government takes the credit risk while the Bank provides liquidity, thereby supporting financing together.

Comment

Japan is a mass of contradictions as we note that annual GDP was higher in the mid 1990s than it is now. The first switch is that the position per head is much better although that is partly because the population is in decline. Of course in terms of demand for resources that is a good thing for a country which has so few of them. That is not so hot when you have an enormous national debt which will be getting a lot larger via the stimulus effort. There are roads where it will reach 300% of GDP quite soon.

So why have things not collapsed under the weight of debt? One reason is the size of the Bank of Japan purchases in what is mostly (90% or so) a domestic market. Then we also need to note that in spite of it being official policy to weaken the Yen ( one of the arrows of Abenomics) it is at 106.4 versus the US Dollar looking strong in spite of all of the above. This is because even if the foreign investors started to leave the Japanese have large savings abroad and large reserves. As we stand they have had little success in pushing the Yen lower even with all the efforts of the Bank of Japan.

What is needed is some sustained economic growth but if Japan could do that the concept of the Lost Decade would have been consigned to the history books and it hasn’t. So we left with this thought by Graham Parker.

And there’s nothing to hold on to when gravity betrays you ( Discovering Japan)

Podcast on GDP measures

Is Japan the future for all of us?

A regular feature of these times is to compare our economic performance with that of Japan. That has propped up pretty regularly in this crisis mostly about the Euro area but with sub-plots for the US and UK. One group that will be happy about this with be The Vapors and I wonder how much they have made out of it?

I’m turning Japanese, I think I’m turning Japanese
I really think so
Turning Japanese, I think I’m turning Japanese
I really think so.

The two basic concepts here are interrelated and are of Deflation and what was called The Lost Decade but now are The Lost Decades. These matters are more nuanced that usually presented so let me start with Deflation which is a fall in aggregate demand in an economy. According to the latest Bank of Japan Minutes this is happening again.

This is because aggregate demand is
highly likely to be pushed down by deterioration in the labor market and the utilization rate of conventional types of services could decline given a new lifestyle that takes into
consideration the risk of COVID-19.

The latter point echoes a discussion from the comments section yesterday about an extension to the railway to the Scottish Borders. Before COVID-19 anything like that would come with a round of applause but now there are genuine questions about public transport for the future. There is an irony close to me as I have lived in Battersea for nearly 3 decades and a tube line there has been promised for most of that. Now it is on its way will it get much use?

This is a difficult conceptual issue because if we build “White Elephants” they will be counted in GDP ( it is both output and income), but if they are not used the money is to some extent wasted. I differ to that extent from the view of John Maynard Keynes that you can dig and hole and fill it in. If that worked we would not be where we are now. In the credit crunch we saw facets of this with the empty hotels in Ireland, the unused airport in Spain and roads to nowhere in Portugal. That was before China built empty cities.

Inflation Deflation

There is something of a double swerve applied here which I will illustrate from the Bank of Japan Minutes again.

Next, the three arrows of Abenomics should continue to be carried out to the fullest extent until the economy returns to a growth path in which the annual inflation
rate is maintained sustainably at around 2 percent.

A 2% inflation target has nothing at all to do with deflation and this should be challenged more, especially when it has this Orwellian element.

It is assumed that achievement of the price stability target will be delayed due to COVID-19
and that monetary easing will be prolonged further

It is not a price stability target it is an inflation rate target. This is of particular relevance in Japan as it has had stable prices pretty much throughout the lost decade period. It is up by 0.1% in the past year and at 101.8 if we take 2015 as 100, so marginal at most. The undercut to this is that you need inflation for relative price changes. But this is also untrue as the essentially inflation-free Japan has a food price index at 105.8 and an education one of 92.7.

Policy Failure

The issue here is that as you can see above there has been a complete failure but that has not stopped other central banks from speeding down the failure road. It is what is missing from the statement below that is revealing.

: the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19); an ample provision of
yen and foreign currency funds without setting upper limits; and active purchases of assets such as exchange-traded funds (ETFs).

No mention of negative interest-rates? Also the large-scale purchases of Japanese Government Bonds only get an implicit mention. Whereas by contrast the purchase of equities as in this coded language that is what “active purchases of assets such as exchange-traded funds (ETFs)” means gets highlighted. The 0.1% will be happy but as any asset price rise is omitted from the inflation indices it is entirely pointless according to their stated objective. No wonder they keep failing…

This matters because pretty much every central bank has put on their running shoes and set off in pursuit of the Bank of Japan. Ever more interest-rate cuts and ever more QE bond buying. Perhaps the most extreme case is the ECB (European Central Bank) with its -0.5% Deposit Rate and large-scale QE. On the latter subject it seems to be actively mirroring Japan.

The ECB may not need to use the full size of its recently expanded pandemic purchase program, Executive Board member Isabel Schnabel says ( Bloomberg)

This is a regular tactic of hinting at reductions whereas the reality invariably ends up on the Andrea True Connection road.

More! More! More!

Staying with the Euro area the ECB has unveiled all sorts of policies and has a balance sheet of 6.2 trillion Euros but keeps missing its stated target. We noted recently that over the past decade or so they have been around 0.7% per year below it and that is not getting any better.

In June 2020, a month in which many COVID-19 containment measures have been gradually lifted, Euro area annual inflation is expected to be 0.3%, up from 0.1% in May ( Eurostat )

Real Wage Deflation

This to my mind is the bigger issue. It used to be the case ( in what was called the NICE era by former Bank of England Governor Mervyn King) that wages grew faster than wages by 1-2% per annum. That was fading out before the credit crunch and since there have been real problems. The state of play for the leader of the pack here has been highlighted by Nippon.com.

Wage growth in Japan is also slow compared with other major economies. According to statistics published by the Organization for Economic Cooperation and Development, the average Japanese annual wage in 2018 was the equivalent of $46,000—a mere 0.2% increase on the figure for 2000 ($45,000).

They mean 2% and everyone else seems to be heading that way.

This increase is significantly smaller than those recorded in the same period in the United States ($53,900 to 63,100), Germany ($43,300 to 49,800), and France ($37,100 to 44,500).

The UK has gone from around $39,000 to the same as France at $44.500.

There is an obvious issue in using another currency but we have the general picture and right now it is getting worse everywhere.

Comment

The answers to the question in my title unfold as follows. In terms of central bank action we have an unequivocal yes. They have copied Japan as much as they can showing they have learnt nothing. We could replace them with an AI version ( with the hope that the I of Intelligence might apply). Related to this is the inflation issue where all the evidence is that they will continue to fail. We have here an example of failure squared where they pursue policies that do not work in pursuit of an objective which would make people worse rather than better off.

That last point feeds into the wages issue which in my opinion is the key one of our times. The Ivory Towers of the central banks still pursue policies where wages growth exceeds inflation and their models assume it. Perhaps because for them it is true. But for the rest of us it is not as real wages have struggled at best and fallen at worst. This is in spite of the increasingly desperate manipulation of inflation numbers that has been going on.

So we see different elements in different places. The Euro area is heading down the same road as Japan in terms of inflation and apart from Germany wages too. The UK is an inflation nation so that part we are if not immune a step or two away from, but that means our real wage performance is looking rather Japanese.

There is also another sub-plot.

30y gilt yield < 30y JGB yield ( Divyang Shah )

The Investing Channel

 

Why are central bankers so afraid of the truth?

We find ourselves in an era where central bankers wield enormous power. There is something of an irony in this. They were given the ability to set monetary policy as a way of taking power out of the hands of politicians.This led to talk of “independence” as they set interest-rates to achieve an inflation target usually but not always of 2% per annum. Actually this is the first falsehood because we are regularly told this.

The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%

They could also tell me the moon is full of cheese but I would not believe that either. I am amazed how rarely this is challenged but price stability is clearly an inflation rate of 0%, The usual argument that this stops relative price shifts collapsed when the oil price fall of 2015/16 gave us inflation of around 0% as plainly there was a relative price shift for oil and indeed other goods. Perhaps the shrieks of “Deflation” were a type of distraction.

Next has come the way that claimed independence has morphed into collusion with the political establishment. This moves us away from the original rationale which was to take monetary policy power out of the hands of politicians to stop them manipulating it for the electoral cycle. What had apparent success which was technocratic control of interest-rates has morphed into this.

  1. Interest-Rates around 0%
  2. Large-Scale purchases of sovereign bonds
  3. Large-Scale purchases of private-sector bonds
  4. Credit Easing
  5. Purchases of equities ( for monetary policy and as a consequence of exchange-rate policy)
  6. Purchases of commercial property so far via Exchange-Traded Funds or ETFs

Not all central banks have gone all the way down the list with the Bank of Japan being the leader of the pack and who knows may go even further overnight at its unscheduled meeting? I should add as people regularly look at my back catalogue that by the time anyone in that category reads this we may see many central banks at step 6 and maybe going further. But back to my collusion point here is some evidence.

I also confirm that the Asset Purchase Facility will remain in place for the financial year 2020-21.

This is almost a throwaway sentence in the inflation remit from the Bank of England but it is in fact extremely important in two ways, and in tune with today’s theme neither of which are mentioned. The Chancellor Rishi Sunak is reaffirming that Her Majesty’s Treasury is backing the QE ( Quantitative Easing ) policies of the Bank of England which currently are steps 2 to 4 above. Next comes the issue of the amount which is huge even for these times.

The Committee voted by a majority of 7-2 for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645 billion.

The 2 dissenters voted for “More! More! More!” rather than less and I expect the extra £100 billion they voted for to be something sung about by The Undertones.

Happens all the time
Its going to happen – happen – till your change your mind
Its going to happen – happen – happens all the time

So we have a doom loop for supporters of independence as the politicians via backing any losses from QE become the masters again and the central bankers become marionettes. As so often we see Japan in the van by the way the Abenomics of Shinzo Abe appointed Governor Kuroda to the Bank of Japan pretty much as they would appoint a minister. It is the most exposed in terms of monetary policy via its 31.4 trillion Yen of equity holdings with a break-even it estimates at around 19,500 in terms of the Nikkei 225 index. Also of course an individual company in which it holds shares could fold.

Forward Guidance

This had a cacophony of falsehoods as we were promised interest-rate rises which failed to happen. In my own country it became laughable as an unemployment rate of 7% was highlighted and then unemployment rates of 6% and 5% were ignored. Then at Mansion House in June 2014 Governor Mark Carney said this.

There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.

In fact a bit over 2 years later he cut them whilst promising to reduce them further than November to 0.1% before economic reality even reached Threadneedle Street and the latter was redacted. It is hard to believe now but many were predicting interest-rate rises by the ECB in 2019 based on Forward Guidance. Of course the US Federal Reserve did actually give it a go before retreating like Napoleon from Moscow and as we recall the role of President Trump in this I would remind you of my political collusion/control point above.

Negative Interest-Rates

This area is littered with falsehoods. In Beatles terms it took only a week for this.

Bank of Japan Governor Haruhiko Kuroda said he is not thinking of adopting a negative interest rate policy now,

to become this.

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank.1 It will cut the interest rate further into negative territory if judged as necessary.

As Hard-Fi put it.

Can’t believe it
You’re so hard to beat
Hard to beat

The new Governor of the Bank of England seems to be on the same road to Damascus. From Sky News yesterday.

Mr Bailey told MPs it was now studying how effective that cut had been as well as “looking very carefully” at the experience of other countries where negative rates had been implemented.

On the prospect of negative rates, he said: “We do not rule things out as a matter of principle.

Curious because that is exactly what people had thought he had done several times in this crisis.

Comment

There are other areas I could highlight as for example there is the ridiculous adherence to the output gap philosophy that has proved to be consistent only in its failures. But let me leave you via the genius of Christine McVie the central bankers anthem.

Tell me lies
Tell me sweet little lies
Tell me lies, tell me, tell me lies
Oh, no, no, you can’t disguise
(You can’t disguise, no, you can’t disguise)
Tell me lies
Tell me sweet little lies

Me on The Investing Channel

 

In the future will all central banks buy equities?

As the weather shows a few signs of picking up in London it appears that one central banker at least has overheated listening to Glen Frey on the radio.

The heat is on, on the street
Inside your head, on every beat
And the beat’s so loud, deep inside
The pressure’s high, just to stay alive
‘Cause the heat is on

Yes it is our favourite “loose cannon on the decks” which is the Bank of England Chief Economist Andy Haldane. He has been quiet in recent times after his Grand Tour around the UK to take central banking to the people and get himself appointed as Governor was widely ignored. But he is back.

LONDON (Reuters) – The Bank of England is looking more urgently at options such as negative interest rates and buying riskier assets to prop up the country’s economy as it slides into a deep coronavirus slump, the BoE’s chief economist was quoted as saying.

The Telegraph newspaper said the economist, Andy Haldane, refused to rule out the possibility of taking interest rates below zero and buying lower-quality financial assets under the central bank’s bond-buying programme.

There is a lot going on there and certainly enough for him to be summoned to the Governor’s study to explain why he contradicted what the Governor had said only a few days before. Also as is his wont Andy had also contradicted himself.

“The economy is weaker than a year ago and we are now at the effective lower bound, so in that sense it’s something we’ll need to look at – are looking at – with somewhat greater immediacy,” he said in an interview. “How could we not be?”

So we have a lower bound for interest-rates but we are thinking of cutting below it? So it is not an effective lower bound then. I can help him out with just a couple of letters as calling it an ineffective lower bound would fix it. Of course Andy has experience of numbers slip-sliding away on his watch as the estimate of equilibrium unemployment has gone from 6.5% to around 4.25% ( it has got a bit vague of late) torpedoing his output gap theories. Even worse of course it will now be going back up. Time for him to move from Glen Frey to Kylie Minogue.

I’m spinning around
Move outta my way

Then there is Andy’s hint about buying equities.

buying lower-quality financial assets

He has a problem with those who recall him pointing out he does not understand pensions so he would not be a stock picker more a tracker man. Although of course in the UK in many ways that means the same thing. For example if we look at Astra Zeneca it was worth just under £108 billion at the beginning of this month and Royal Dutch Shell some £95 billion whereas if we those bandying for the number 100 slot we are between £3 and £3.5 billion. Then the FTSE 100 is over 80% of the all-share so by now I think you will have figured that yet again such a policy would benefit big business. Andy may not have done so as his “Sledgehammer QE” of 2016 dashed into such UK stalwarts as er Apple and Maersk. An error being repeated in the current operations.

Chair Powell

Chair Powell of the US Federal Reserve was interviewed on 60 Minutes yesterday which was likely to be more like 40 minutes when you allow for adverts. What did he say? Well after a really odd section on virology we got this burst of hype.

But I would just say this. In the long run, and even in the medium run, you wouldn’t want to bet against the American economy. This economy will recover. And that means people will go back to work. Unemployment will get back down. We’ll get through this. It may take a while. It may take a period of time. It could stretch through the end of next year. We really don’t know. We hope that it will be shorter than that, but no one really knows.

Eyes will have turned to the hint that it might be in 2022 as that begs a lot of questions as to what the Federal Reserve might do in the meantime. What about this for instance?

I continue to think, and my colleagues on the Federal Open Market Committee continue to think that negative interest rates is probably not an appropriate or useful policy for us here in the United States. ( Chair Powell)

“probably not” eh? That is leaving the door open to a change of mind. This is in spite of the fact that in central banking terms this is quite a damning critique ( as it involves an implicit criticism of other central banks).

The evidence on whether it helps is quite mixed.

Also as section which is just plain wrong.

PELLEY: So the banks would pay people to borrow money, essentially?

POWELL: Yes.

Let us now move onto what might be called the money shots.

POWELL: Well, there’s a lot more we can do. We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have. So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to.

The track record of central bankers using the phrase “no limit” is not good as the Swiss National Bank most famously found out. But there was more and the emphasis below is mine.

POWELL: Well, to begin, the one thing we can certainly do is we can enlarge our existing lending programs. We can start new lending programs if need be. We can do that. There are things we can do in monetary policy. There are a number of dimensions where we can move to make policy even more accommodative. Through forward guidance, we can change our asset purchase strategy. There are just a lot of things that we can do.

Comment

Central bankers are like gamblers on a losing streak desperately doubling down. You do not need to take my word for it as we can take a look at a country which has been enthusiastically buying equities for a while now, which is Japan. For example the Bank of Japan bought over 100 billion Yen’s worth as recently as Friday on its way to this.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

As of the last update the Bank of Japan had bought some 31.4 trillion Yen of equity ETFs. How is that going?

Japan fell into a technical recession in the first quarter for the first time since 2015

That is from the Financial Times. If you think that does not do justice to an economy 2% smaller than a year ago and seeing nominal GDP declines with a large national debt, well the FT is Japanese owned these days. Meanwhile back in the real world the lost decade(s) carries on.

Why would you copy that? Yet we seem likely to do so…..

Podcast on the UK Gilt Market

 

The central banking parade continues

The last 24 hours have seen a flurry of open mouth operations from the world’s central bankers. There are a couple of reasons for this of which the first is that having burst into action with the speed of Usain Bolt they now have little to do. The second is that they have become like politicians as they bask centre stage in the media spotlight. The third is that their policies require a lot of explaining because they never achieve what they claim so we see long words like “counterfactual” employed to confuse the unwary.

The land of the rising sun

Let us go in a type of reverse order as Governor Kuroda of the Bank of Japan has been speaking this morning and as usual has uttered some gems.

BoJ Gov Kuroda: Repeats BoJ Would Not Hesitate To Add Additional Easing If Needed -BoJ Has Several Tools And Measures To Deploy If Required ( @LiveSquawk )

This is something of a hardy perennial from him the catch though comes with the “if required” bit. You see the April Economic Report from the Ministry of Finance told us this.

The Japanese economy is getting worse rapidly in an extremely severe situation, due to the Novel Coronavirus…….Concerning short-term prospects, an extremely severe situation is expected to remain due to the influence of the infectious disease. Moreover, full attention should be given to the further downside risks to the domestic and foreign economy which are affected by the influence of the infectious disease.

So if not now when? After all the Japanese economy was already in trouble at the end if 2019 as it shrank by 1.8% in the final quarter. Actually he did kind of admit that.

BoJ’s Kuroda: Japan’s Economy To Be Substantially Depressed In Q2

Then looking at his speech another warning Klaxon was triggered.

In the meantime, it expects short- and long-term policy interest rates to remain at their present
or lower levels.

This raises a wry smile because in many ways the Bank of Japan is the central bank that likes negative interest-rates the least. Yes it has one of -0.1% but it tiptoed into it with the minimum it felt it could and stopped, unlike in other easing areas where it has been happy to be the leader of the pack. Why? Well after nearly 30 years of the lost decade it still worries about the banking sector and whether it could survive them and gives them subsidies back as it is. Frankly it has been an utter disaster and shows one of the weaknesses of the Japanese face culture.

Oh and as we mull the couple of decades of easing we got this as well.

KURODA: RECENT EASING ACTION INCLUDING MORE ETF PURCHASES IS TEMPORARY ( @DeltaOne)

This morning there was just over another 100 billion Yen of equity ETF purchases as we mull another refinement of the definition of temporary in my financial lexicon for these times. It appears to mean something which keeps being increased and never ends.

The Bank of England

The new Governor Andrew Bailey gave an interview to Robert Peston of ITV last night which begged a few questions. The first was how its diversity plans seem to involve so much dealing with the children of peers of the realm and Barons in particular? This of course went disastrously wrong with Deputy Governor Charlotte Hogg who seemed to know as little about monetary policy as she did about the conflict of interest issue which led to her departure. During the interview Robert Peston seemed to be exhibiting a similar degree of competence as I pointed out on social media.

@Peston  now says that buying hundreds of billions of debt is different to a decade ago when the Bank of England bought er hundreds of billions of debt. It is frightening that this man was once BBC economics editor.

There was a policy element although it was not news to us I am sure it was to some.

Governor of the Bank of England Andrew Bailey has told ITV’s Peston show that one of the main purposes of the Bank buying £200bn of government debt – and probably more over the course of the Covid-19 crisis – is to “spread the cost of this thing to society” and help the government avoid a return to austerity. ( ITV)

To the extent that there was a policy announcement the whole interview was very wrong as it should be on the Bank of England website for all to see rather than boosting the career of one journalist and network. As I note how that person’s career had been under pressure we see the UK establishment in action. I also note that two subjects were not mentioned.

  1. The apparent dirty protest at the FCA on Andrew Bailey’s watch
  2. The doubling of overdraft interest-rates after a botched intervention by the FCA on Andrew Bailey’s watch.

The United States

Something rather ominous happened last night as The Hill reports.

“He has done a very good job over the last couple of months, I have to tell you that,” Trump told reporters during a meeting with the governors of Colorado and North Dakota. “Because I have been critical, but in many ways I call him my ‘MIP.’ Do you know what an MIP is? Most improved player. It’s called the Most Improved Player award.”

We noted back in November 2018 that The Donald was taking charge of US monetary policy and that Jerome Powell had become something of a toy. Indeed there was more.

The president said he still is at odds with Powell over his stance on negative interest rates. Trump has for months pushed negative interest rates, arguing the U.S. is on an unfair playing field if other countries have negative rates.

Whilst I disagree with The Donald on negative interest-rates he is at least honest and we know where he stands. Whereas Chair Powell said this.

Speaking to the Peterson Institute for International Economics, Powell said negative interest rates are “not something that we’re looking at,” ( Forbes)

Is that an official denial? Anyway it does not go that well with this.

The economic toll has taken an outsized toll on lower-income households, Powell said, with 40% of those employed in February and living in a household that makes less than $40,000 a year losing their job in March.

Conceptually this is a real issue for the US Federal Reserve as such people are unlikely to have many holdings ( or indeed any…) of the assets it keeps pumping up the price of.

Comment

As we survey the scene some of it is surreal. I noted on Tuesday that the US had already seen two examples of negative interest-rates and one has deepened in the meantime. US Feds Funds futures have moved as high as 100.025 for the summer of 2021 and 100.05 for the autumn. Now -0.05% is not a lot but these things have a habit of being like a balloon that is about to be inflated.

You may also note that those who have claimed central banks are independent of government have been silent recently.Perhaps they are busy redacting past comments?

Missing for today’s update so far has been the European Central Bank or ECB. This is because it is involved in something of an internal turf war.

The shock at the ruling is palpable in the corridors of power in Berlin as Karlsruhe’s three-month deadline runs down.

Officials are trying to work out a way of satisfying the court without eroding the independence of the ECB, which has kept the euro zone intact through a decade of crises.

One lawmaker described feeling like a bomb disposal expert, “because the Constitutional Court has put an explosive charge under the euro and the EU”. ( Reuters)

Hang on! Someone still thinks central banks are independent…….

The Tokyo Whale is hungry again!

A new week has started with something which we will find awfully familiar although not everyone will as I will explain. But first let me give you something of a counterpoint and indeed irony to the news.

SINGAPORE (Reuters) – Oil prices fell on Monday on signs that worldwide oil storage is filling rapidly, raising concerns that production cuts will not come fast enough to fully offset the collapse in demand from the coronavirus pandemic.

U.S. oil futures led losses, falling by more than $2 a barrel on fears that storage at Cushing, Oklahoma, could reach full capacity soon. U.S. crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017. [EIA/S]

In ordinary times this would be a case of let’s get this party started in Japan. This is because it is a large energy importer and thus it would be getting both and balance of payments and manufacturing boost. In itself it would have been extremely welcome because you may recall that its economy had seen a reverse before the present pandemic.

The contraction of Japan’s 4Q 2019 GDP was worse than expected, coming in at -1.8% q/q (- 7.1% annualized rate) versus the first estimate of -1.6% q/q (-6.3% annualized rate) as the contraction in business spending was deeper than what was first reported in February, ( FXStreet )

So the land of the rising sun or Nihon was already in what Taylor Swift would call “trouble, trouble,trouble”, The raising of the Consumption Tax ( what we call VAT) had in an unfortunate coincidence combined with the 2019 trade war. The former was rather like 2014 as we mull all the promises it would not be. Also let me give you a real undercut, Japan acted to improve its fiscal position just in time for it to be considered much less important.

The Tokyo Whale

Let me open with something which for newer readers may come as a shock.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

Yes the Bank of Japan is buying equities and has just suggested it will double its annual purchases of them. Those who follow me will be aware it has been buying more as for example it is now buying around 120 billion Yen on the days it buys ( nine so far in April) as opposed to the previous 70 billion or so having bought over 200 billion when equity markets were hit hard. The detail is that it buys via Exchange Traded Funds ( ETFs) to avoid the embarrassment of having to vote at AGMs and the like.

Oh and in another familiar theme upper limits are not always upper limits.

With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amount of purchases depending on market conditions.

Also the ,you may note that the limit for commercial property purchases has been doubled too. I do sometimes wonder why they bother with the commercial property buys although now we have an extra factor which is that in so many places around the world commercial property looks under a lot of pressure. For example if there is more working from home as seems likely.

The Precious! The Precious!

Japan has an official interest-rate of -0.1% but not for quite everybody.

(3) apply a positive interest rate of 0.1 percent to the outstanding balances of current accounts held by financial institutions at the Bank that correspond to the amounts outstanding of loans provided through this
operation.

For whom?

Twice as much as the amounts outstanding of the loans will continue to be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank.

Yes the banks and as you can see they will be a “double-bubble” gain from lending under the new Bank of Japan scheme. I wonder if the Japanese taxpayer has noted that extension of operations to the private debt sphere as well?

expand the range of eligible collateral to private debt in general, including household debt (from about 8
trillion yen to about 23 trillion yen as of end-March 2020),

Corporate Bonds and Commercial Paper

I have highlighted another risk being taken on behalf of the Japanese taxpayer.

The Bank decided, by a unanimous vote, to significantly increase the maximum amount
of additional purchases of CP and corporate bonds and conduct purchases with the upper
limit of the amount outstanding of about 20 trillion yen in total. In addition, the maximum amounts outstanding of a single issuer’s CP and corporate bonds to be purchased will be raised substantially.

Should there be a default there might be trouble.

The Bank will increase the maximum share of the Bank’s holdings of CP and corporate
bonds within the total amount outstanding of issuance by a single issuer from the current
25 percent to 50 percent and 30 percent, respectively.

Surely at any sign of trouble everyone will simply sell to the Bank of Japan which will then be a buyer of more like first than last resort.

Who will provide the grand design?
What is yours and what is mine?
‘Cause there is no more new frontier
We have got to make it here ( The Eagles )

Japanese Government Bonds

This is something we have been expecting and just as a reminder the previous target was between 70 and 80 trillion Yen a year.

The Bank will purchase a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

It is hard to get too worked up about that as we have been expecting it to be along. In theory the plan remains the same, although there is a slight shuffle as in the past they have indicated a range between 0% and -0.1%.

Comment

The first issue is that the Japanese economy is doing extremely badly. It already had problems and the PMI business survey suggested a GDP decline of the order of 10%. With its “face” culture that is likely to be an underestimate. In response there has been this.

The Japanese government has outlined details of its plan to hand out 100,000 yen, or more than 900 dollars, in cash to all residents as part of its economic response to the coronavirus outbreak.

The cash handouts will go to every person listed on Japan’s Basic Resident Register, regardless of nationality. ( NHK)

They tried something like this back in the 90s and I remember calculating it as £142 as compared to £752 this time. As to adjusting for inflation well in the Lost Decade era Japan has seen so little of that.

So we see that the Bank of Japan is underwriting the spending plans of the Japanese government which of course is the same Japanese government which underwrites the bond buying of the Bank of Japan! It seems set to make sure that the Japanese government can borrow for free in terms of yield as I note this.

In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

In fact just like a parent speaking to a child you can indulge in the JGB market but only if you play nicely.

While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

You will find many cheering “Yield Curve Control” although more than a few of those will be hoping that there claims that the Bank of Japan will need to intervene less have been forgotten. Actually there have been phases where it has kept yields up rather than down.

In the future will the Bank of Japan own everything?

The Express

I have done some interviews for it recently and here is one on the benefits of lower oil prices

https://www.express.co.uk/finance/city/1272278/coronavirus-news-oil-prices-negative-inflation-uk-wages-spt

Podcast on central bank equity purchases

 

The first business surveys about this economic depression appear

This morning has seen the first actual signals of the scale of the economic slow down going on. One of the problems with official economic data is the  time lag before we get it and this has been exacerbated by the fact that this has been an economic contraction on speed ( LSD). By the time they tell us how bad it has been we may be in quite a different world! It is always a battle between accuracy and timeliness for economic data. Thus eyes will have turned to the business surveys released this morning.

Do ya do ya do ya do ya
Ooh I’m looking for clues
Ooh I’m looking for clues
Ooh I’m looking for clues ( Robert Palmer)

Japan

The main series began in Japan earlier and brace yourselves.

#Japan‘s economic downturn deepens drastically in March, dragged down by a sharp contraction in the service sector, according to #PMI data as #coronavirus outbreak led to plummeting tourism, event cancellations and supply chain disruptions. ( IHS Markit )

The composite output index was at 35.8 which indicates an annualised fall in GDP ( Gross Domestic Product) approaching 8% should it continue. There was a split between manufacturing ( 44.8) and services ( 32.7) but not the way we have got used to. The manufacturing number was the worst since April 2009 and the services one was the worst since the series began in 2007.

France

Next in the series came La Belle France and we needed to brace ourselves even more.

March Flash France PMI suggest GDP is collapsing at an annualised rate approaching double digits, with the Composite Output PMI at an all-time low of 30.2 (51.9 – Feb). Both services and manufacturers recorded extreme drops in output on the month.

There was more to come.

French private sector activity contracted at the
sharpest rate in nearly 22 years of data collection
during March, amid widespread business closures
due to the coronavirus outbreak.

There are obvious fears about employment and hence unemployment.

Amid falling new orders, private sector firms cut
their staff numbers for the first time in nearly threeand-a-half years during March. Moreover, the rate
of reduction was the quickest since April 2013.

I also noted this as I have my concerns about inflation as the Ivory Towers work themselves into deflation mode one more time.

Despite weaker demand conditions, supply
shortages drove input prices higher in March…….with
manufacturers raising output prices for the first time
in three months

We could see disinflation in some areas with sharp inflation in others.

Germany

Next up was Germany and by now investors were in the brace position.

The headline Flash Germany
Composite PMI Output Index plunged from 50.7 in
February to 37.2, its lowest since February 2009.
The preliminary data were based on responses
collected between March 12-23.

This led to this analysis.

“The unprecedented collapse in the PMI
underscores how Germany is headed for recession,
and a steep one at that. The March data are
indicative of GDP falling at a quarterly rate of
around 2%, and the escalation of measures to
contain the virus outbreak mean we should be
braced for the downturn to further intensify in the
second quarter.”

You may be thinking that this is better than the ones above but there is a catch. Regular readers will recall that due to a problem in the way it looks at supply this series has inflated the German manufacturing data. This has happened again.

The headline Flash Germany
Manufacturing PMI sank to 45.7, though it was
supported somewhat by a further increase in
supplier delivery times – the most marked since
July 2018 – and a noticeably slower fall in stocks of
purchases, both linked to supply-side disruption

So the truth is that the German numbers are closer to France once we allow for this. We also see the first signals of trouble in the labour markets.

After increasing – albeit marginally – in each of the
previous four months, employment across
Germany’s private sector returned to contraction in
March. The decline was the steepest since May
2009 and was underpinned by similarly sharp drops
in workforce numbers across both manufacturing
and services.

Also we note a continuing pattern where services are being hit much harder than manufacturing, Of course manufacturing had seen a rough 2019 but services have essentially plunged at a rapid rate.

The Euro Area

We do not get much individual detail but you can see that the other Euro area nations are doing even worse.

The rest of the euro area reported an even
steeper decline than seen in both France and
Germany, led by comfortably the sharpest fall in
service sector activity ever recorded, though
manufacturing output also shrank at the steepest
rate for almost 11 years.

I am trying hard to think of PMI numbers in the 20s I have seen before.

Flash Eurozone Services PMI Activity Index(2)
at 28.4 (52.6 in February). Record low (since
July 1998)

Putting it all together we get this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

The UK

Our numbers turned up to a similar drum beat and bass line.

At 37.1 in March, down from 53.0 in February, the seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – signalled the fastest downturn in private sector business activity since the series began in January 1998. The prior low of 38.1 was seen in November 2008.

This was supported by the manufacturing PMI being at 48 but it looks as though we have at least some of the issues at play in the German number too.

Longer suppliers’ delivery times are typically seen as an
advance indicator of rising demand for raw materials and
therefore have a positive influence on the Manufacturing PMI index.

The numbers added to the household finances one from IHS Markit yesterday.

UK consumers are already feeling the financial pinch of
coronavirus, according to the IHS Markit UK Household Finance Index. With the country on the brink of lockdown during the survey collection dates (12-17 March), surveyed households reported the largest degree of pessimism towards job security in over eight years,
with those employed in entertainment and manufacturing sectors deeming their jobs to be at the most risk.

Comment

So we have the first inklings of what is taking place in the world economy and we can add it to the 40.7 released by Australia yesterday. However we need a note of caution as these numbers have had troubles before and the issue over the treatment of suppliers delivery times is an issue right now. Also it does not appear to matter if your PMI is 30 or 37 we seem to get told this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

Now I am slightly exaggerating because they have said 1.5% to 2% for the UK but if we are there then France and the Euro area must be more like 3% and maybe worse if the series is to be consistent.

Next I thought I would give you some number-crunching from Japan.

TOKYO (Reuters) – The Bank of Japan on Tuesday acknowledged unrealized losses of 2-3 trillion yen ($18-$27 billion) on its holdings of exchange-traded funds (ETFs) after a rout in Japanese stock prices, raising the prospect it could post an annual loss this year.

Our To Infinity! And Beyond! Theme has been in play for The Tokyo Whale and the emphasis is mine.

Its stock purchase started at a pace of one trillion yen per year in 2013 when the Nikkei was around 12,000. The buying expanded to 3 trillion yen in 2014 and to 6 trillion yen in 2016, ostensibly to boost economic growth and lift inflation, but many investors view the policy as direct intervention to prop up share prices.

Surely not! But the taxpayer may be about to get a warning of sorts.

The unrealized loss of 2-3 trillion yen would wipe out about 1.7 trillion yen of recurring profits the BOJ is estimated to make this year from interest payments on its massive bond holdings, said Hiroshi Ugai, senior economist at J.P. Morgan.

For today that will be on the back burner as the Nikkei 225 equity index rose 7% to just above 18,000 which means that its purchases of over 200 billion Yen yesterday will be onside at least as we note the “clip size” has nearly trebled for The Tokyo Whale.

 

 

The biggest move by the US Federal Reserve was the one concerning liquidity or FX Swaps

Last night the week started with the arrival of the Kiwi cavalry as the Reserve Bank of New Zealand announced this.

The Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months.

With international sporting events being cancelled this was unlikely to have been caused by a defeat for the All Blacks as the statement then confirmed.

The negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus.

But soon any muttering in the virtual trading rooms was replaced by quite a roar as this was announced.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective. ( US Federal Reserve)

So a 1% interest-rate cut to the previous credit crunch era low for interest-rates and whilst the timing was a surprise it was not a shock. This is because on Saturday evening President Donald Trump had ramped up the pressure by saying that he had the ability to fire the Chair Jeroen Powell. The odd points in the statement were the reference to returning to being “on track” for its objectives which seems like from another world as well as reminding people of Greece which has been “on track” to recovery all the way through its collapse into depression. Also “strong labor market conditions” is simply untrue now. All that is before the reference to inflation returning to target when some will be paying much higher prices for goods due to shortages.

QE5

This came sliding down the slipway last night which will have come as no surprise to regular readers who have followed to my “To Infinity! And Beyond!” theme.

To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.

This is quite punchy as we note that the previous peak for its balance sheet was 4.5 trillion Dollars and now it will go above 5 trillion. The Repos may ebb and flow bad as we stand it looks set to head to 5.2 trillion or so. The odd part of the statement was the reference to the “smooth functioning” of the Treasury Bond market when buying such a large amount further reduces liquidity in a market with liquidity problems already. For those unaware off the run bonds ( non benchmarks) have been struggling recently. The situation for mortgage bonds is much clearer as some will no doubt be grateful for any buyers at all. Although whether buying the latter is a good idea for the US taxpayer underwriting all of this is a moot point. At least the money used is effectively free at around 0%.

Liquidity Swaps

This was the most significant announcement of all for two reasons. Firstly it was the only one which was coordinated and secondly because it stares at the heart of one of the main problems right now. Cue Aloe Blacc.

I need a dollar dollar, a dollar is what I need
Hey hey
Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me
Bad times are comin’ and I reap what I don’t sow.

I have suggested several times recently that there will be banks and funds in trouble right now as we see simultaneous moves in bond, equity and oil markets. That will only be getting worse as the price of a barrel of Brent Crude Oil approaches US $31. This means that some – and the rumour factory will be at full production – will be finding hard to get US Dollars and some may not be able to get them at all. So the response is that the main central banks will be able to.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

These central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points.

So it appears that price matters for some giving us a hint of the scale of the issue here. If I recall correct a 0.5% cut was made as the credit crunch got into gear. Also there was this enhancement to the operations.

 To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular U.S. dollar liquidity operations have also agreed to begin offering U.S. dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations during the week of March 16.

Then we got something actively misleading because the real issue here is for overseas markets.

The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of U.S. dollar funding markets.

For newer readers wondering who these might be? The main borrowers in recent times have been the European Central Bank and less so the Bank of Japan. This is repeated at the moment as some US $58 million was borrowed by a Euro area bank last week. Very small scale but maybe a toe in the water.

Comment

Some of the things I have feared are taking place right now. We see for example more and more central banks clustering around an interest-rate of 0% or ZIRP ( Zero Interest-Rate Policy). Frankly I expect more as you know my view on official denials.

#BREAKING Fed’s Powell says negative interest rates not likely to be appropriate ( @AFP )

You could also throw in the track record of the Chair of the US Federal Reserve for (bad) luck.

Meanwhile rumours of fund collapses are rife.

Platinum down 18%, silver down 14% Palladium down 12%, Gold down 4% – someone is getting liquidated ( @econhedge )

Some of that may be self-fulfilling but there is a message in that particular bottle.

As to what happens next? I will update more as this week develops but I expect more fiscal policy back stopped by central banks. More central banks to buy equities as I note the Bank of Japan announced earlier it will double its operations this year. Helicopter Money is a little more awkward though as gathering to collect it would spread the Corona Virus. As Bloc Party put it.

Are you hoping for a miracle? (it’s not enough, it’s not enough)
Are you hoping for a miracle? (it’s not enough, it’s not enough)
Are you hoping for a miracle? (it’s not enough, it’s not enough)
Are you hoping for a miracle? (it’s not enough, it’s not enough)

Let me sign off for today by welcoming the new Bank of England Governor Andrew Bailey.

Podcast

I would signpost the second part of it this week as eyes will turn to the problems in the structure of the ECB likely to be exposed in a crisis.