Is it to be QE for everyone and everywhere?

It was only yesterday that I signed off with the heat is on and indeed it was. That was true if you looked at the fall in the UK Pound or the Norwegian Krona and even more so with crude oil. In response there was an evening emergency meeting ( by telephone) of the European Central Bank. This was because it had been on the back foot in several of its bond markets in spite of its announcement of more QE ( Quantitative Easing) bond buying as recently as last Thursday. In Italy the benchmark ten-year yield approached 3% and reignited crisis fears. So let us go to the response and the emphasis is mine.

To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.

We know what temporary means as for example the original emergency interest-rate cuts were supposed to be that as was the original QE and negative interest-rates. They are all still here. In a way that is the difference this time around as central bank action is supposed to be reversed a few years later when things are better but that never happened. Instead it is “More! More! More!”

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

Actually they highlight my temporary point because that feels like an end date but later we get this.

The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.

Number-Crunching

There are various perspectives to this as assuming they started immediately which they have then there will now be around 115 billion Euros of QE bond purchases from the ECB. There was also this for Italy.

If capital key is fully respected this means almost 10.5 bln additional monthly purchases of BTPs, for the next 9 months. #BringItON  ( @gusbaratta)

As you can see Gus was enthusiastic. I do not know if he was long the market but anyway it seemed set to offer some relief to hard-pressed Italy.

There was also something that looks set to be significant but has got a little lost in the fog.

To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face.

That made me thing of the capital key point made by Gus where purchases are proportionate to each country’s share in the ECB itself, This is mostly but not entirely related to the size of their economy. So clearing the decks in case Italy for example needs more and also at the other end of the scale should they run out of bonds to buy in the Netherlands or Germany.

Also there was a plan for Greece.

A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP.

Rather curiously there are not that many Greek bonds to buy because they have bought so many in the past! The European Stability Mechanism has a very large holding for example.

Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt.

Market Reaction

It seems as though the ECB has steamed in this morning all guns blazing or as they put it.

At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

This has seen the Italian bond future rally over 8 points to 138 as the ten-year yield fell to 1.7%. This is a tactical success although care is needed as only central bankers regard paying much more for something as a success. It should help Italy relax fiscal policy if it is sustained. However, there is a deeper perspective which is that some short of Italian bonds will have been screaming for the financial stretcher-bearers and may not return. Please remember that if down the road we see central bankers and their acolytes complaining of a lack of liquidity.

The situation in equity markets is not so happy because as I type this the Dax of Germany is some 1% lower although the EuroStoxx 50 is hanging onto a few points gain.

The Euro

This is off 1% versus the US Dollar at 1.083 but as we looked at yesterday we are seeing a phase of King Dollar so the picture is blurry. We maybe learn a little that the Euro has slipped against the UK Pound £ but the move is much smaller than its gain yesterday so again we learn not much. So lower yes but we have no way of knowing if the QE has contributed much here in another fail for economics 101.

On that subject someone has announced this morning that they are buying.

The SNB is intervening more strongly in the foreign exchange market to contribute to the stabilisation of
the situation. ( Swiss National Bank)

Australia

It feels like yesterday when the Reserve Bank of Australia announced it might do QE if interest-rates were cut to 0.25%. Well this morning we learnt that beds may be burning in the land of midnight oil.

A reduction in the cash rate target to 0.25 per cent.

Followed by.

A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.

This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow.

As I have pointed out earlier please remember the “market dislocations” bit should liquidity disappear and the RBA complains about it.

Poland

Earlier this week the Polish central bank joined the party.

NBP will also purchase government bonds on the secondary
market as part of the structural operations that change the long-term liquidity structure in the banking sector and contribute to maintaining the liquidity in the government bond secondary market.

Notice how they are getting a liquidity denial in early? Also they did this.

The Council decided to cut the NBP reference rate by 0.5 percentage points, i.e. to 1.00%

Bank of Korea

From Bloomberg.

The Bank of Korea plans to buy $1.2 billion in government bonds to stabilize markets

I would imagine the central banking dark web is full of messages saying “lightweights” after starting with such a small amount.

Comment

When the credit crunch started some central banks sung along with Huey Lewis and te News.

I want a new drug, one that won’t hurt my head
One that won’t make my mouth too dry
Or make my eyes too red

As time has passed more joined in and now the chorus is deafening as more join the QE party. I expect that there will be more in terms of volume for existing players and more new entrants because it is now about oiling the wheels of fiscal policy. When central banks were made “independent” this was not the purpose ( they are not that bright) but the traditional bureaucratic way of appointing people who are to coin a phrase “one of us” means that actually they are doing more than elected politicians would be allowed to. There is a democracy deficit hidden behind the crisis measures.

The picture is complex as there are many areas which badly need help right now. On a personal level in a short space of time I heard about 2 people losing jobs and a business owner losing work. But the history of central bank action is that it favours big not small business or the self employed. One certainty is that once we get any bit of stability the money will pour into the housing market as banks find that easy to do.

Meanwhile we are reminded that mistakes can be very expensive but not for our lords and masters.

Last Thursday: Lagarde says ECB is not there to close bond spreads

Tonight: ECB announces an extra 750 billion of QE to close bond spreads

 

Japan and Korea have chosen a bad time to fire up their own trade war

This is a story influenced by a brewing trade war but not the one that you might think. It is between Japan and Korea and the latest phase started in July when Japan imposed restrictions on trade with Korea for 3 chemicals. This gets more significant when you realise that they are crucial for smartphones ( displays on particular) and that according to CNBC Japan is responsible for 90% of the world’s supply of them. This affects quite of bit of Korean industry with Samsung being the headliner. Them Japan dropped Korea from its whitelist of trusted trading partners making trade more difficult before Korea did the same.

According to Bloomberg Citigroup have tried to downplay this today but I note these bits of it.

Meanwhile, boycotts in South Korea have led to a plunge in sales of Japanese consumer goods and a decrease in tourists to Japan, who may have decided to travel domestically instead, according to Citi………Last month, South Korean exports to Japan fell 14 percent, while imports from Japan slid 23 percent. South Korea’s trade ministry attributed the declines to industrial factors rather than trade actions.

Ah an official denial! We know what that means.

The issue has deep roots in the past and the Japanese occupation of the Korean peninsula a century ago as well as its later use of Korean “comfort women.” That explains the Korean issue with Japan and on the other side the Japanese consider themselves superior to Koreans and in my time there were quite open about it. Whilst he initially made moves to calm the situation there was always going to be an issue with a nationalistic politician like  Shinzo Abe running Japan.But let us move on noting that both countries will be experiencing an economic brake.

Japan Economic Growth

Let me hand you over to The Japan Times which gives us the position and some perspective.

In the third quarter the world’s third-largest economy grew an annualized 0.2 percent, slowing sharply from a revised 1.8 percent expansion in April to June, according to preliminary gross domestic product data released by the government Thursday.

It fell well short of a median market forecast for a 0.8 percent gain, and marked the weakest growth since a 2.0 percent contraction in the July-September period last year.

So over the past six months Japan has grown by 0.5% and we also get an idea of the erratic nature of economic growth there.This is partly due to the way that Japan does not conform to stereotype as it has struggled more than elsewhere to measure GDP. Partly due to last year’s third quarter drop. annual growth has picked up to 1.3% but that looks like being the peak.

Why? Well the 0.2% growth was driven by a 0.9% rise in domestic demand ( both numbers are annualised) just in time for the consumption tax to be raised. Actually private consumption was up 1.4% in the quarter suggesting that purchases were being made ahead of the rise.

At the end of last month this was reinforced by this.

The Consumer Confidence Index (seasonally adjusted series) in October 2019 was 36.2, up 0.6 points from the previous month.

Yes it was up but you see the number had fallen from around 44 at the opening of 2018 and these are the lowest readings since 2011.

Korea Economic Growth

Real gross domestic product (chained volume measure of GDP) grew by 0.4 percent in the third quarter of 2019 compared to the previous quarter……Real GDP (chained volume measure of GDP) increased by 2.0 percent year on
year in the third quarter of 2019.

In a broad sweep this means that economic growth has been slowing as it was 3.2% in 2017 and 2.7% in 2018. Rather unusually Korea saw strong export growth especially of we look at what was exported.

Exports increased by 4.1 percent, as exports of goods such as motor vehicles and semiconductors expanded. Imports were up by 0.9 percent, owing to increased imports of transportation equipment.

Also manufacturing grew.

Manufacturing rose by 2.1 percent, mainly due to an increase in computer, electronic and optical products.

However the economy has been slowing and if either of those reverse will slow even more quickly. Back on the 18th of October we noted this response.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.50% to 1.25%.

This was more of an external rather than an internal move as last week we learnt this.

During September 2019 Narrow Money (M1, seasonally adjusted, period-average) increased by 0.6% compared to the previous month.

So whilst it had been weak as annual growth was 3.3% in June it has risen since to 5% which is slightly above the average for 2018.

However they could cut on inflation grounds as this from Korea Statistics shows.

The Consumer Price Index was 105.46(2015=100) in October 2019. The index increased 0.2 percent from the preceding  month and was unchanged from the same month of the previous year.

According to the Bank of Korea the outlook is for more of the same.

 The Producer Price Index increased by 0.1% month-on-month in September 2019 – in year-on-year terms it decreased by 0.7%.

Exchange Rate

This is at 10.68 Won to the Yen as I type this and is up over 7% over the past year. So an additional factor in the situation will be that the Korean’s have been winning the currency war. This of course, will be annoying for Shinzo Abe who’s Abenomics programme set out to weaker the Japanese Yen. As we stand Korea has an official interest-rate some 1.35% higher so there is not a lot the Bank of Japan can do about this.

Comment

As we stand it initially looks as if Korea will be the relative winner here.

“Domestic demand had made up for some of the weakness in external demand, but we can’t count on this to continue,” said Taro Saito, executive research fellow at NLI Research Institute.

“A contraction in October-December GDP is a done deal. The economy may rebound early next year, but will lack momentum.” ( Japan Times)

But the argument it is in a stronger position weakens somewhat if we switch to its Gross National Income.

Real gross domestic income (GDI) increased by 0.1 percent compared to the previous quarter.

Over the past year it has gone on a quarterly basis -0.3%,0.2%,-0.7% and now 0.1%.

Korea is looking to use fiscal policy to stimulate its economy which sets it in the opposite direction to the consumption tax rise in Japan. But as they use a time of trouble to posture and scrap let us look at something that they share.

Korea’s potential output growth is expected to fall further in the long term, as the productive population declines in line with population aging and the low fertility rate……In addition, it is necessary to slow down the decline in labor supply resulting from population aging and the low birth rate, through policy efforts including encouraging women and young people to participate in economic activities and coping actively with the low birth rate. ( Bank of Korea Working Paper )

I wonder what the latter bit really means?

Meanwhile this is the last thing Japan needs right now.

(Reuters) – Japan’s Nissan Motor Co Ltd (7201.T) has said it is recalling 394,025 cars in the United States over a braking system defect, causing concerns that a brake fluid leak could potentially lead to a fire.

Podcast

 

 

The link between “currency wars” and central banks morphing into hedge funds

The credit crunch era has brought us all sort of themes but a lasting one was given to us by Brazil’s Finance Minister back in September of 2010. From the Financial Times.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.

The issue of fears that countries were undertaking competitive devaluations was something which raised a spectre of the 1920s being repeated. I note that Wikipedia calls it the Currency War of 2009-11 which is in my opinion around 7 years too short as of the countries mentioned back in the FT article some are still singing the same song and of course Japan redoubled its efforts and some with the advent of Abenomics.

The Euro

It was only last week that we looked at the way Germany has undertaken a stealth devaluation ironically in full media view via its membership of the Euro. But also of course if QE is a way of weakening your currency then the ECB ( European Central Bank) has had the pedal to the metal as it has expanded its balance sheet to around 4.5 billion Euros. On this road it has become something of an extremely large hedge fund of which more later but currently hedge funds seem to be fans of this.

If we combine this with the positive trade balance of the Euro area which has been reinforced this morning by Germany declaring a 25.4 billion current account surplus in November we see why the Euro was strong in the latter part of 2017. We also see perhaps why it has dipped back below 1.20 versus the US Dollar and the UK Pound £ has pushed above 1.13 to the Euro as currency traders wonder who is left to buy the Euro in the short-term?

But let us move on noting that a deposit rate of -0.4% and QE of 30 billion Euros a month would certainly have been seen as a devaluation effort back in September 2010.

Turning Japanese

Has anyone tried harder than the Japanese under Abenomics to reduce the value of their currency? We have seen purchases of pretty much every financial asset ( including for newer readers commercial property and equities) as the Bank of Japan balance sheet soared soared to nearly ( 96%) a years economic output or GDP. This did send the Yen lower but in more recent times it has not done much at all to the disappointment of the authorities in Tokyo. Is that behind this morning’s news that the Bank of Japan eased its bond buying efforts? Rather than us turning Japanese are they now aping us gaijin? It is too early to say but it is intriguing to note that December was a month in which the Bank of Japan’s balance sheet actually shrank. Care is needed here as for example the US Federal Reserve is in the process of shrinking its balance sheet but some data has seen it rise.

Perhaps the Bank of Japan should play some George Michael from its loudspeakers.

Yes I’ve gotta have faith…
Mmm, I gotta have faith
‘Cause I gotta have faith, faith, faith
I gotta have faith-a-faith-a-faith

South Korea and the Won

Last week we got a warning that a new currency wars outbreak was on the cards as this was reported. From CNBC.

South Korea’s central bank chief said that the bank will leave its currency to market forces, but would respond if moves in the won get too big. Lee Ju-yeol said the Bank of Korea will take active steps when herd behavior is seen.

Not quite a full denial but yesterday forexlive reported something you are likely to have already guessed.

Bank of Korea is suspected to have bought around $1.5 billion in USD/KRW during currency trading today.

As we wonder what herd was seen in the Won as of course the “Thundering Herd” or Merrill Lynch is no longer with us? Also as this letter from the Bank of Korea to the FT last year confirms Korea does not play what Janet Kay called “Silly Games”.

First, Korea does not manage exchange rates to prevent currency appreciation. The Korean government does not set a specific target level or direction of the exchange rate. The Korean won exchange rate is basically determined by the market, and intervention is limited to addressing disorderly market movements.

Next time lads it would be best to leave this out.

Second, Korea’s current account surplus should not be understood as evidence of its currency undervaluation.

Of course not. Anyway the Won has been strong.

The South Korean currency surged almost 13 percent last year, as an expanding trade surplus and the nation’s first interest-rate increase in six years boosted its allure. (Bloomberg).

Another way of looking at that is to look back over the credit crunch era. We do see that the Won dropped like a stone against the US Dollar to around 1600 but with ebbs and flows has returned to not far from where it began to the 1060s. Of course we can get some more insight comparing more locally and if we look at the real trade-weighted exchange rates of the BIS ( Bank for International Settlements) then there was a case against the Yen in fact a strong one. Compared to 2010= 100 the Japanese Yen was at 73.7 ( see above) but the Won was at 113. However the claim of a strong currency might get the Chinese knocking at the South Korean’s door as the Yuan was at 121.4.

China

Perhaps the Chinese are now on the case as Bloomberg reports.

The yuan, which headed for its biggest drop in two months on the news, is allowed to move a maximum of 2 percent either side of the fixing. Analysts said the change shows China is confident in the yuan’s current trajectory, which has been one of steady appreciation.

Hedge Fund Alert

There are two pieces of good news for the modern theory of central banks morphing into hedge funds around this morning so let us first go to Switzerland.

According to provisional calculations, the Swiss National Bank (SNB) will report a profit in
the order of CHF 54 billion for the 2017 financial year. The profit on foreign currency
positions amounted to CHF 49 billion. A valuation gain of CHF 3 billion was recorded on
gold holdings. The net result on Swiss franc positions amounted to CHF 2 billion

With all that profit the ordinary Suisse may wonder why they are not getting more?

Confederation and cantons to receive distribution of at least
CHF 2 billion

Whilst the SNB behaves like a late Father Christmas those in charge of the ever growing equity holdings at the Bank of Japan may be partying like it is 1999 and having a celebratory glass of sake on this news.

Japan’s Nikkei 225 reaches fresh 26-year high; ( FT)

Meanwhile a not so polite message may be going from the ECB to the Bank of Finland.

The European Central Bank has sold its bonds of scandal-hit retailer Steinhoff , data showed on Monday, potentially suffering a loss of up to 55% on that investment. (Reuters)

Comment

So there you have it as we see that the label “currency wars” can still be applied albeit that the geography of the main outbreak has moved across the Pacific. Actually Japan was always in the game and it is no surprise that its currency twin the Swiss Franc is the other central bank which has become a subsidiary of a hedge fund. That poses a lot of questions should the currency weaken as the Swissy has albeit so far only on a relatively minor scale. There have been discussions so far this year about how bond markets will survive less QE but I do not see anyone wondering what might happen if the Swiss and Japanese central banks stopped buying equities and even decided to sell some?

For all the fire and fury ( sorry) there remains a simple underlying point which is that if one currency declines falls or devalues then others have to rise. That is especially awkward for central banks as they attempt to explain how trying to manipulate a zero-sum game brings overall benefits.