Was that the bond market tantrum of 2019?

Sometimes economics and financial markets provoke a wry smile. This morning has already provided an example of that as Germany’s statistics office tells us Germany exported 4.6% more in September than a year ago, so booming. Yes the same statistics office that told us yesterday that production was down by 4.3% in September so busting if there is such a word. The last couple of months have given us another example of this do let me start by looking at one side of what has taken place.

QE expansion

We have seen two of the world’s major central banks take steps to expand their QE bond buying one explicitly and the other more implicitly. We looked at the European Central Bank or ECB only on Wednesday.

The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP)……….. at a monthly pace of €20 billion as from 1 November 2019.

More implicitly have been the actions of the US Federal Reserve as it continues to struggle with the Repo crisis.

Based on these considerations, last Friday the FOMC announced that the Fed will be purchasing U.S. Treasury bills at least into the second quarter of next year.7 Specifically, the Desk announced an initial monthly pace of purchases of $60 billion.

That was John Williams of the New York Fed who added this interesting bit.

These permanent purchases

Also there is this.

In concert with these purchases, the FOMC announced that the Desk will continue temporary overnight and term open market operations at least through January of next year.

Maybe a hint that they think dome of this is year end US Dollar demand. But we find that the daily operations continue and at US $80.14 billion as of yesterday they continue on a grand scale. So the Treasury Bill purchases and fortnightly Repo’s have achieved what exactly?

If we move from the official denials that this is QE to looking at the balance sheet we see that it is back above 4 trillions dollars and rising. In fact it was US $4.02 trillion at the end of last month or around US $250 billion higher in this phase.

Bond Markets

You might think and indeed economics 101 would predict that bond markets would be surging and yields falling right now. But we have learnt that things are much more complex than that. Let me illustrate with the US ten-year Treasury Note. You might expect some sort of boost from the expansion of the balance sheet and the purchases of Treasury Bills. But no, the futures contact which nearly made 132 early last month is at 128 and a half now. At one point yesterday the yield looked like it might make 2% as there was quite a rout but some calm returned and it is 1.91% as I type this.

As an aside this is another reminder of the relative impotence of interest-rate cuts these days as if anything a trigger for yields rising was the US interest-rate cut last week. The Ivory Towers will be lost in the clouds yest again.

The situation is even more pronounced in the Euro area where actual purchases have been ongoing for a week now. However in line with our buy the rumour and sell the fact theme we see that the German bond market has fallen a fair bit. In mid-August the benchmark ten-year yield went below -0.7% whereas now it is -0.26%. So Germany is still being paid to borrow at that maturity but considerably less. Indeed at the thirty-year maturity they do have to pay something albeit not very much ( 0.24%).

The UK

There have been a couple of consequences in the UK. The first I spotted in yesterday’s output from the Bank of England.

Mortgage rates and personal loan rates remain near
historical lows, with the rates on some fixed-rate mortgages continuing to fall over the past few months (Table 2.B).
Interest rates on credit cards have increased, although the effective rate paid by the average borrower has remained
stable, in part because of the past lengthening of interest-free periods.

Whilst this is true, if you are going to parade the knowledge of the absent-minded professor Ben Broadbent about foreign exchange options then you should be aware that as Todd Terry put it.

Something’s goin’ on

The five-year Gilt yield has risen from a nadir of 0.22% to 0.52% so the ultra-low period of mortgage rates is on its way out should we stay here.

If we move to the fiscal policy space in the UK then we see that the message that we can borrow cheaply has arrived in the general election campaign.

Although debt stocks are high in many developed countries, debt service ratios are very low. The UK gross debt stock has doubled from 42 per cent of GDP in 1985 to 84 per cent of GDP today, yet debt interest service has halved, from 4 per cent of GDP to below 2 per cent over the same period. It has rarely been lower. A rule using the debt stock would argue for fiscal consolidation, whereas a debt service metric suggests there is ample room for fiscal expansion. Especially as market interest rates are extraordinarily low. (  FT Alphaville)


I have avoided the political promises which peak I think with the Greens suggestion of an extra £100 billion a year. But the Toby Nangle and Neville Hill proposal above has strengths and has similarities to what I have suggested here for some time. But I think it needs to come with some way of locking the debt costs in, so if you borrow more because it is cheap you borrow for fifty years and not five. It reinforces my suggestion of the 27th of June that the UK should issue some 100 year Gilts.


There is a fair bit to consider here and let me start with the borrow whilst it is still cheap theme. There are issues as highlighted by this from Francine Lacqua of Bloomberg.

London’s Elizabeth line has been delayed by a year, and will require extra funding, according to TfL

For those unaware this was called Crossrail ( renaming is often a warning sign) which will be a welcome addition to the London transport infrastructure combing elements of The Tube with the railways. But it gets ever later and more expensive.

There was also some irony as regards the Bank of England as in response to the sole decent question at its presser yesterday (from Joumanna Bercetche of CNBC) Governor Carney effectively suggested the next rate move would be down not up. Yet Gilt yields rose.

Next comes the issue of whether this is a sea-change or just part of the normal ebb and flow of financial markets? We will find out more this afternoon as we wait to see if there were more than just singed fingers in the German bond market for example or whether some were stopped out? After all reporting you had taken negative yield and a capital loss poses more than a few questions about your competence. Even the most credulous will now know it is not a one-way bet but on the other hand if you are expecting QE4 to come down the New York slipway then you can place your bets at much better levels than before.

Do not forget Greece is still in an economic depression

Today I intend to look at something which I and I know from your replies many of you have long feared. This is that the merest flicker of better news from Greece will be used as a way of obscuring the fact that it is still in an economic crisis. At least I think that is what we should be calling an economic depression. So let me take you straight to the Financial Times.

Today, on the face of things, the emergency is over and the outlook is bright. The authorities have lifted capital controls, imposed four years ago. Greece’s 10-year bond yield touched an all-time low in July. Consumer confidence is at its highest level since 2000. Elections in July produced a comfortable parliamentary majority for New Democracy, a conservative party committed under prime minister Kyriakos Mitsotakis to a well-designed programme of economic reform, fiscal responsibility and administrative modernisation.

Firstly let me give the FT some credit for lowering its paywall for a bit. However the latter sentence is playing politics which is an area they have got into trouble with this year on the subject of Greece but I will leave that there as I keep out of politics.

As to the economics you may note that the first 2 points cover financial markets rather than the real economy and even the first point is a sentiment measure rather than a real development. If we work our way through them it is of course welcome that capital controls have now ended although it is also true that it is troubling that they lasted for more than four years.

Switching to Greek bonds we see that they did indeed join the worldwide bond party. I am not quite sure though about the all-time July low as you see it is 1.31% as I type this compared to being around 1% higher than that in July! Perhaps he has not checked since it dipped below 2% at the end of July which is hardly reassuring. As to why this has happened other than the worldwide trend there are 2 other factors. Firstly there is the way that the European Stability Mechanism has changed the debt envelope as the quote from Karl Regling below shows.

 In total, Greece received almost €290 billion in financial support, of which €205 billion came from the EFSF and the ESM.

So the Greek bond yield is approaching what the ESM charges. Another factor is they way that it has confirmed my “To Infinity! And Beyond!” theme as the average maturity was kicked like a can to 42.5 years. Next is a factor that I looked at on the 9th of July and Klaus also notes.

The general government primary balance in programme terms last year registered a surplus of 4.3% of GDP, strongly over-performing the fiscal target of 3.5% of GDP.

This is awkward for the political theme of the article as it was achieved by the previous government. Also let me be clear that whilst this is good for bond markets there is a big issue for the actual economy as 4.3% of demand was sucked out of it which is a lot is any circumstance but more so when you are still in an economic depression.

So it is a complex issue which to my mind has seen Greek bond yields move towards what the ESM is charging which is ~1%. Maybe the ECB will add it to its QE programme as well as whilst it does not qualify in terms of investment rating it could offer a waiver.

Greek Consumer Confidence

I have to confess referring to a confidence signal does set off a warning klaxon. But let us add in this from the Greek statistics office.

The overall volume index in retail trade (i.e. turnover in retail trade at constant prices) in June 2019, increased by
2.3%, compared with the corresponding index of June 2018……..The seasonally adjusted overall volume index in June 2019, compared with the corresponding index of May 2019, increased by 2.5%.

So there has been some growth. However there is a but and it is a BUT. You might like to sit down before you read the next bit. The volume index in June was 103.5 which compares to 177.7 in March 2008 and yes you did read that right. I regularly point out that monthly retail sales numbers are erratic so let me also point out that late 2007 and early 2008 had a sequence of numbers in the 170s. Even worse this century started with a reading of 115.4 in January 2000.

So we have seen a little growth but not much since the index was set at 100 in 2015 and you can either have a depression lasting this century or quite a severe depression since 2008 take your pick. Against that some optimism now is welcome but does not really cut it in my opinion.

Economic growth

There is a reference to it.

Even before these clouds appeared on the horizon, however, Greece was not rebounding from the debt crisis with the vigour of other stricken eurozone economies such as Ireland, Portugal and Spain.

That is one way of putting a level of GDP that has fallen 18% this decade. In 2010 prices it opened this decade with a quarterly performance of just over 59 billion Euros whereas in the second quarter of this year it was 48.3 billion. I am nit sure that “clouds on the horizon” really cover an annual growth rate struggling to each 2% after such a drop. Greece should be rebounding but of course as I have already pointed out the dent means that 4.3% of economic activity was sucked out of it last year. So no wonder it is an L-shaped and not a V-shaped recovery. At the current pace Greece may not get back to its previous peak in the next decade either.


There are some references to ongoing problems in Greece as for example the banks.

A second factor is the fragility of Greece’s banks. By the middle of this year, they were burdened with about €85bn in non-performing loans. To some extent, however, liquidity conditions are now improving.

Not mentioned is the fact that according to the Bank of Greece more than another 40 billion Euros needs writing off. From January 19th.

An absolutely indicative example can assess the immediate impact of a transfer of about €40 billion of NPLs, namely all denounced loans and €7.4 billion of DTCs ( Deferred Tax Credits).

That brings us to another problem which is that the debt was supposed to fall from 2012 onwards whereas even now there are plans for it to grow. So whilst the annual cost has been cut to low levels the burden just gets larger.

Also there has been a heavy human cost in terms of suicides, hospitals not being able to afford drugs and the like. It has been a grim run to say the least. The ordinary Greek did not deserve anything like that as they were guilty of very little. The Greek political class and banks were by contrast guilty of rather a lot. The cost is an ongoing depression which looks like it will continue for quite some time yet. After all I welcome the lower unemployment rate of 17% but also recall that such a rate was considered quite a disaster on the way up.

Is this the real life? Is this just fantasy?
Caught in a landslide, no escape from reality
Open your eyes, look up to the skies and see ( Queen)


Will the 2020’s be a decade of currency devaluations?

Sometimes financial markets set the agenda for the week and as this week began they did so as the Renminbi ( Yuan) of China passed what some might call lucky number 7. The New York Times has put it like this.

The renminbi traded in mainland China on Monday morning at roughly 7.02 to the dollar, compared with about 6.88 late on Friday. A higher number represents a weaker currency. The last time China’s currency was weaker than 7 to the dollar was in 2008, as the financial crisis mounted.

In itself a 0.01 move through 7 is no more significant than any other. But that would be in a free float which is not what we have here. Also there has been a move of the order of 2% in total which is significant for an exchange rate which is both closely watched and would be more accurately described as a sort of managed free float. Anyway you do not have to take my word for it as in a happy coincidence the People’s Bank of China has been explaining its position.

China implements a managed floating exchange rate system based on market supply and demand with reference to a basket of currencies. Market supply and demand play a decisive role in the formation of exchange rate. The fluctuation of RMB exchange rate is determined by this mechanism . This is the proper meaning of the floating exchange rate system. From the perspective of the global market, as the exchange rate between currencies, exchange rate fluctuations are also the norm.

There are more holes than in a Swiss Cheese there as we observe an official denial that China has done this deliberately.

Affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China, the RMB has depreciated against the US dollar today, breaking through 7 yuan, but the renminbi continues to be stable and strong against a basket of currencies. This is the market. Supply and demand and the reflection of fluctuations in the international currency market.

The PBOC clearly does not follow UK politics as otherwise it would know “strong and stable” means anything but these days! For example  the Reminbi has fallen by 1.8% versus the Japanese Yen if we stay in the Pacific and by 1.7% versus the Euro if we look wider.

Time for a poetic influence

I regularly report on the rhetoric of central bankers but I am not sure I have seen anything like this before.

It should be noted that the RMB exchange rate is “ breaking 7” . This “7” is not the age. It will not come back in the past, nor is it a dam. Once it is broken, it will bleed for thousands of miles. “7” is more like the water level of the reservoir, and the water is abundant. The period is higher, and it will fall down when it comes to the dry season. It is normal to rise and fall.

Perhaps the online translator does not help much here but there is a lot more going on than for example the English translation of the Japanese government always being “bold action” for the Yen.

Up is the new down

If your currency is falling then the obvious “Newspeak” response is to suggest it is rising.

In the past 20 years, the nominal effective exchange rate and the real effective exchange rate of the RMB calculated by the Bank for International Settlements have appreciated by about 30% , and the exchange rate of the RMB against the US dollar has appreciated by 20% . It is the strongest currency among the major international currencies. Since the beginning of this year, the renminbi has remained in a stable position in the international monetary system. The renminbi has strengthened against a basket of currencies, and the CFETS renminbi exchange rate index has appreciated by 0.3%

However if you are telling people this is due to the market it might be best to avoid phrases like “control toolbox,”

In the process of dealing with exchange rate fluctuations in recent years, the People’s Bank of China has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox.

So let me finish this section by pointing out that the PBOC has “allowed” the Reminbi to go through 7 this morning in response to something we noted on Friday.

Trade talks are continuing, and…..during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…

As the Frenchman puts it in the Matrix series of films.

action and reaction, cause and effect.

Bond Markets

One immediate impact of this has been that bond markets have surged again and we are reminded of my topic on Friday. The totem pole for this has been the bond or bund market of Germany where we see two clear developments. Another record high as the ten-year yield falls to -0.52% and as I type this the whole curve has a negative yield. Over whatever time span you choose Germany is being paid to borrow.


I do not envy the person who had the job of explaining market developments to Governor Kuroda at the Bank of Japan daily meeting. Firstly the Yen has surged into the 105s versus the US Dollar which is exactly the reverse of the Abenomics strategy of Japan. Then there was the 366 point fall in the Nikkei 225 index which is not so welcome when you own 5% of the shares on the Tokyo Stock Exchange. At least the trading desk will have been spared the job as they will have been busy buying the 70.5 billion Yen’s worth of equities that are typically bought on down days like this. This is neatly rounded off by the Japanese Government Bond market not rallying anything like as much as elsewhere due to the “yield curve control” policy backfiring and providing a clean sweep.

Oh and the day of woe was rounded off by the South Korean’s buying much fewer Japanese cars.


Regular readers will recall the period that I labelled the Yen and the Swiss Franc the “currency twins”. Well they are back just like Arnie and in fact with a 2.2% rally against the Renminbi it is the Swiss Franc which is the powerhouse today. It has rallied against pretty much everything as we remind ourselves of the last policy statement of the Swiss National Bank.

The situation on the foreign exchange market continues to be fragile. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential in order to keep the
attractiveness of Swiss franc investments low and thus ease pressure on the currency.

Well they were right about “fragile”. Do not be surprised if we see the SNB intervening again which will be further bullish for overseas bond and equity markets as that is where they invest much of the money.

Mind you equity markets are falling now meaning this from last week is already out of date.

SNB‘s pile of U.S. shares hits a record $93 billion on buoyant markets ( Bloomberg)

The Ashes

As I hope that England’s sadly rickety batting order can resist the pressure from a land down under today I have been mulling something else. Both countries have weak currencies at the moment and are perhaps singing along with Level 42.

The Chinese way
Who knows what they know
The Chinese legend grows

I could never lie
For honour I would lie
Following the Chinese way



Just like in the 1920’s will the 2020’s open with some competitive devaluations?

President Trump seems to quite like the idea if his tweets are any guide. In the Euro area we see a central bank that seems set to follow policies which in theoretical terms at least should weaken the Euro although the ECB is swimming against the trade surplus. I have covered the Swiss and the Japanese. So let me leave you with two final thoughts.

In the confused melee has the UK stolen something of a march?

Is there a major economy who wants a stronger currency?







The bond market surge is the financial news story of 2019

This has been quite an extraordinary year in financial markets and we find that even the summer lull is being very active.Or rather it tried to go quiet and then kicked off again. The good news is that amongst a sea of indifference and sadly ignorance we have been on the case. What I am referring to is the surge in bond markets that has taken them to quite extraordinary heights and changes a large proportion of the financial landscape. So let’s get straight to it and where else to start but with President Trump.

Trade talks are continuing, and…..during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…

So he now plans to expand his tariff trade war to pretty much everything Chine exports to the US. This has had the usual impact of lowering equity markets, strengthening the Yen ( into the 106s versus the US Dollar) and more importantly for our purposes today sending bond markets surging again.

This is our first lesson of the day which is that the financial markets version of economics 101 does still apply in some areas. What I mean by this is that sharp falls in equity markets still make bond markets rally. The logic such as it is comes from the fact that bonds pay a regular coupon as opposed to lower equity returns which makes the bonds more attractive. I am sure that many of you have spotted what Shakespeare would call the “rub” in this so for the moment let our analysis remain in the United States where there still are positive bond yields.

The situation now is that the ten-year Treasury Note now yields a mere 1.84% whereas yesterday I was reviewing a post US Federal Reserve 2,04%. The exact levels will change as this is a febrile volatile environment but the general picture has been singing along with Alicia Keys.

Oh baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’

I keep on

This has caught out US Federal Reserve Chair Jerome Powell as he was doing his best to pour cold water on the view that interest-rates are about to be chopped. In a sense this shows that whilst central banks have a lot of power they were accurately described by Hall and Oates.

You’re out of touch

Anticipation of the extra US $40 billion of bond purchases on their way via the (even earlier) ending of QT or Quantitative Tightening will have pushed the market higher on their own. But they found that The Donald was there with some petrol and a match. Oh and according to Market watch he may have just found another petrol can.

President Donald Trump on Friday will make an announcement on European Union trade at 1:45 p.m. Eastern, according to the White House’s daily guidance. Trump has threatened tariffs on European Union cars as well as food and alcohol, and plane makers Airbus AIR, -4.54% and Boeing BA, -2.02% have also been the source of trade tensions between the two sides.

So let me conclude the section on the world’s largest bond market with two points. Chair Powell thinks he is in charge but in reality a combination of President Trump and the markets are running rings around him, Next is that the real world economic effects of this will be cheaper fixed-rate mortgages and business borrowing as well as lower borrowing costs for the US government. Leaving us with a view that the Trump era is a curious combination of blazing away incoherently in the moment but also showing signs of an underlying plan as he gets lower bond yields for his fiscal expansionism.


He was right by the way it is more today. Also as a nuance the amount of corporate debt that has a negative yield has passed the US $1 trillion mark. A nice little earner for some and of course as we look at the overall picture I find myself musing about future trends.

Glaciers melting in the dead of night
And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole

The UK

The situation here is remarkable in its own way. Even Bank of England Governor Mark Carney could not entirely blame Brexit for the situation.

Since May, global trade tensions have intensified, global activity has remained soft, and the perceived likelihood of a no-deal Brexit has increased significantly. These developments have led to substantial declines in market interest rates and a marked depreciation of sterling.

Let me give credit to Joumanna Bercetche of CNBC who asked a question about Forward Guidance. After all Governor Carney has been giving Forward Guidance about interest-rate rises through the period that bond yields have plunged. Sadly he deployed the tactic of answering a question he would have preferred to have been asked, gambling that no-one in the press corps would have the chutzpah to point that out.

This matters because we find ourselves in an extraordinary situation with the five-year yield at a mere 0.33% this morning. Firstly let me point out the ongoing excellence of the comments section of this blog as Kevin suggested we would reach 0.4% a while back when such views were deeply unfashionable elsewhere. Next this should be impacting on fixed-rate mortgages as banks can fund very cheaply in this area now although so far there seems to have been little sign of this, so perhaps the banks are keeping the change here for themselves. Finally the UK can borrow ever more cheaply an issue which the media and the “think-tanks” keep ignoring as they pontificate over whether the government can spend more? Of course it can at these yields! Whether that is a good idea or whether it will spend it wisely are different matters.

There is a curious situation in the UK yield curve where the five year yield at 0.33% is below the two-year at 0.42% and the ten-year at 0.55% so let me explain it. We have a 0.75% Bank Rate which in explicit terms only applies overnight but let us more loosely say until the next Bank of England meeting. That has more of an influence on the two-year which is why it is higher. But even so it is some 0.33% below the Bank Rate.

Before I move on let me point out how extraordinary this is by reminding everyone that the last time we were here the Bank of England was involved in making some £60 billion of purchases at almost any price. In fact as it wanted lower Gilt yields back then it wanted to pay more. How insane in the membrane is that?


It is rather kind of financial markets to help me out here as just as I start typing this section they reach a threshold.

German bonds at -0.5% yield Klaxon.

The benchmark ten-year yield is already telling us what it expects the new ECB deposit rate to be. Or perhaps I should say the maximum as the two-year is at -0.78%.

Let me resume my insane in the membrane theme with this.

Putting it another way here is Bloomberg.

Borrowing costs for house purchases and companies in Italy are at an all-time low

Politicians must wish they had thought of the idea of creating “independent” central banks even earlier than they did……

What could go wrong? Well let me start you off, with a quarterly and annual economic growth rate of 0% it does not seem to be doing Italy much good.

The Bank of Japan fears no longer being the “leader of the pack”

The next two weeks look set to bring a situation you might not expect. After all Japan has built a reputation as the “leader of the pack” as the Shangri-Las would put it in terms of monetary policy easing. Except that it is now facing a situation where it looks set to be left behind. On Thursday the European Central Bank will announce its latest moves and its President Mario Draghi has been warming us up for some action. Either he will announce an interest-rate cut or he will signal one for September. So there are two perspectives here for Japan. The first is that the Euro area looks set to cut by the total amount that Japan has below zero as 0.1% is the minimum and of course 0.2% would be double it. Next is the issue that the new rate of -0.5% or -0.6% would be a considerable amount lower than in Japan.

If we now shift to the United States the US Federal Reserve looks set to cut interest-rates as well when it meets at the end of the month. There was a spell last week when financial markets switched to expecting a 0.5% cut which would put the new rate at 1.75% to 2%. Personally I am far from convinced by that and a 0.25% cut seems much more likely but nonetheless it puts the Bank of Japan under pressure.

The Yen

The factors we have looked at above will be putting some upwards pressure on the Yen as interest-rate expectations shift against it. This has been reinforced by an unintended consequence of the policy applied by the central planners at the Bank of Japan.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent). With regard
to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding
of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline. JGBs with a wide range of maturities will continue to be eligible for purchase, while the guideline for average remaining maturity of the Bank’s JGB purchases will be abolished.

The problem here as I have pointed out before is that something which was supposed to have kept Japanese Government Bond ( JGB) yields down has ended up keeping them up. Ooops! As world bond markets have surged Japan has been left behind because its bond market is essentially run by the Bank of Japan ( 80 trillion yen a year buys you that) and it has been wrong footed completely. The recent surge began in early March and the German ten-year yield has fallen as much as by 0.6% and the US by 0.8% but Japan by only 0.16%.

So as you can see relative interest-rates and yields have moved to support the Yen since the early spring of this year. The policy of “yield curve control” aiming for bond yields of 0% to -0.1% no doubt seemed a good way of continuing the Abenomics policy of weakening the Yen at the time. However over the period that bond markets have surged the Yen has strengthened from 112 versus the US Dollar to 108 now. That is before we see any shift in the rhetoric of President Trump who as the tweet from the early part of this month below points out, wants a weaker US Dollar.

China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!

That will have been viewed with horror in Tokyo because whilst The Donald is not currently putting Japan in his cross hairs they have looking to weaken the Yen since Abenomics began back in 2013. This would be quite a reverse for Japan as it would not want to get into a currency war with the United States.

Moving to other currencies we see that the Yen has been strengthening against the Euro and the UK Pound as well. Indeed we get another perspective I think from looking at Switzerland which regular readers will know I labelled as a “Currency Twin” with Japan due to the way both currencies were borrowed heavily in the pre credit crunch period. There are increasing rumours that the Swiss National Bank has been getting the equivalent of an itchy collar over the strength of the Swiss Franc and has been checking the markets as a hint that it may intervene again. It may well find itself having to match any ECB interest-rate cut and that will echo in Tokyo as well as giving us a new low for negative interest-rates.

The Pacific Trade Crisis

The stereotype of this area is of fast growing economies with the image of many of them being Pacific Tigers compared to the more sclerotic Western nations. Yet troubles are there too now so let us go to Seoul on Thursday.

The Monetary Policy Board of the Bank of Korea decided today to lower the Base Rate by 25 basis points, from 1.75% to 1.50%.

Okay why?

With respect to future domestic economic growth, the Board expects that the adjustment in construction investment will continue and exports and facilities investment will recover later than originally expected,
although consumption will continue to grow. GDP is forecast to grow at the lower-2% level this year, below the April forecast (2.5%).

This morning has brought more news on that front. From Bloomberg.

South Korea’s exports, a bellwether for global trade, appear set for an eighth straight monthly decline as trade disputes take a toll on global demand. Exports during the first 20 days of July fell 14 percent from a year earlier, data from the Korea Customs Service showed Monday. Semiconductor sales plunged 30 percent, while shipments to China, the biggest buyer of South Korean goods, fell 19 percent.

Korea is a bellwether as these numbers are released very promptly and many of its companies are integrated into global supply chains, so it gives a signal for world trade. Currently it is not good and there is a direct link to Japan.

Imports from the U.S. rose 3.7 percent, while those from Japan dropped 15 percent.

Also on Thursday Bank Indonesia decided to join the party.

The BI Board of Governors agreed on 17th and 18th July 2019 to lower the BI 7-day Reverse Repo Rate by 25 bps to 5,75%,

A day earlier say troubling news for the economy of Singapore.

SINGAPORE’S exports, already in double-digit decline for three straight months, fell again in June, according to Enterprise Singapore data released on Wednesday morning.

Non-oil domestic exports (NODX) were down by 17.3 per cent on the year before – a six-year low  ( Business Times )


The Bank of Japan finds itself between a rock and a hard place on quite a few fronts. The Yen has been strengthening and other central banks are on their way to matching its policies. That is before we get to the issue of the clear trade slow down in the Pacific region. This will add to the problem hidden in what looked on the surface as solid economic growth in the first part of the year.

In the three-month period, exports dropped 2.4 percent and imports sank 4.6 percent, as in the initial reading. As a result, net exports — exports minus imports — pushed up GDP by 0.4 percentage point. ( Japan Times).

In all other circumstances the Bank of Japan would cut interest-rates in a week. But they do not like negative interest-rates much and they are buying pretty much everything ( bonds, equities and commercial property) as it is! In October another Consumption Tax rise is due as well. Perhaps Bryan Ferry was right.

Say, when you’ve been around, what’s left to do?
Don’t know? Ask Tokyo Joe
So inscrutable her reply
“Ask no question and tell me no lie”




Where next for the US economy?

The end of the week has an American theme as we have just had Independence Day and it will be followed by the labour market and non-farm payrolls data. So a belated happy Independence Day to my American readers. But behind all that is a more troubled picture for the US economy that opened 2019 in fine form.

Real gross domestic product (GDP) increased at an annual rate of 3.1 percent in the first quarter of 2019 (table 1), according to the “third” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent. ( BEA)

There was a further sub-plot in that not only had economic growth picked up to ~0.8% as we measure it the falling trend of the previous three quarters was broken. But as I pointed out on the 8th of May a warning light had started to flash.

The narrow measure of the money supply or M1 in the United States saw a fall of just over forty billion dollars in March. That catches the eye because it does not fit at all with an economy growing at an annual rate of 3.2%. Indeed we see now that over the three months to March M1 money supply contracted by 2.7%.

What about now?

The money supply picture is not as dark as it looked back then. In fact the contraction of the previous three months of 2.7% has now been replaced by growth of 2.7%. However that is below the annual rate of growth of 3.8% so a gentle brake is still in play as opposed to the previous sharp one. This compares to 8.5% in 2017 as a whole and 4.4% in 2018.

As to the pick-up more recently it may be related to this change in Federal Reserve policy.

The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019.

So it is no longer acting to reduce the growth rate of the narrow money supply on the same scale. As to how quickly that will impact is not so easy to say because if we look back in time the timescales of similar policies were rather variable. This was the so-called Overfunding phase in the UK when we sold an excess amount of Gilts to reduce the money supply and discovered if we cut to the chase that it was not as simple as it might appear. There is a difference in that we were aiming ( and quite often missing) a broad rather than narrow money measure.

As cash was in the news only yesterday let me point out that at the end of May the M1 money supply comprised some US $1.65 trillion as opposed to US $2.14 trillion of demand and chequeable deposits. There is a blast from the past disappearing as until the end of December the US Fed recorded some £1.7 billion of Travellers Cheques, does anybody still use them?

Other Signals

We get an idea from the New York Fed.

The New York Fed Staff Nowcast stands at 1.3% for 2019:Q2 and 1.2% for 2019:Q3.

News from this week’s data releases decreased the nowcast for both quarters by 0.1 percentage point.

Negative surprises from housing data and the Advance Durable Goods Report accounted for most of the decrease.

As you can see they are rather downbeat for the middle part of 2019 with economic growth being of the order of 0.3% as we would measure it. The Atlanta Fed nowcast is a few days more recent but comes to the same 1.3% answer for the quarter just gone.

A particular driver of that is something that like in the UK has lost much of its ability to shock because it has become part of the economic landscape.

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $55.5 billion in May, up $4.3 billion from $51.2 billion in April, revised. ( BEA )

That increase in the deficit is a downwards pull on GDP via net exports and is part of a pretty consistent trend in the year so far.

Year-to-date, the goods and services deficit increased $15.7 billion, or 6.4 percent, from the same period in 2018. Exports increased $5.1 billion or 0.5 percent. Imports increased $20.8 billion or 1.6 percent.

That shows that the trade war does not appear to be going that well as you can see. As to the total effects here is the Bank of England on the subject.

The Bank estimates that these measures will reduce global GDP by only around 0.1%, and the
further US-China tariffs that took effect in May and June will roughly double that effect.

But that may not be the end of the story. The additional tariffs threatened by the US on China and on auto
imports more generally would raise average US tariffs to rates not seen in half a century. If
implemented, they could reduce global GDP by an additional 0.6% through direct trade channels alone.

What will the Federal Reserve Do Next?

If the latest speech from Chair Powell is any guide it seems to be trying to take us for fools.

 The Fed is insulated from short-term political pressures—what is often referred to as our “independence.”

I should note that this came before the appointment of a politician to the ECB Presidency but that really is only part of something which which we have long been aware of. Believing in it these days is a bit like believing in Father Christmas. As to the economic situation we were told this.

Since then, the picture has changed. The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy……The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation. Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened.


The next signal for the US economy has been the surge in bond markets. The US ten-year yield was 3.24% in the early part of last November as opposed to 1.97% as I type this. The expectation shifted as we noted back then shifted from interest-rate rises to cuts and on a simple level a two-year yield of 1.78% is expecting three of them which is punchy when we have not had any yet. So they have been accurate in expecting a slowing of the US economy and the prospects for more QE bond buying and have got a slowing of the reduction in QE and a September date for its end.

Moving to the labour market most of the signals do not tell us much at this stage of the cycle. After ten years of expansion for the economy jobs growth should have slowed. But there are two numbers which do tell is something. The first is wages growth because with the rise in employment and fall in unemployment it should have surged but has not. Whilst I welcome wage growth of a bit over 3% it has underperformed compared to the past which is perhaps related to another problem. It gets reported less these days but the change in the labour participation rate is equivalent to around 11 million people.

Both the labor force participation rate, at 62.8 percent, and the employment-population ratio, at 60.6 percent, were unchanged in May.

There is also the issue of leveraged loans which ironically lower interest-rates and bond yields are only likely to make worse. Here is the Bank of France on the subject.

Leveraged loans are loans extended to highly indebted companies. Their strong growth in the US over the last five years and their packaging into securitised financial products bear a number of similarities with the subprime market that triggered the 2008 crisis. While the comparison is debatable, the risks posed by the leveraged loan market to financial stability should not be ignored.

Also in an era of H2O and Woodford there is this.

The presence of Exchange Traded Funds and Mutual Funds means that retail investors have access to these loans in the United States – although they still only account for a minority of investors. Moreover, these structures present a maturity mismatch between their assets and their liabilities. Investors can redeem their fund shares very quickly, whereas underlying assets (leveraged loans) tend to have much longer transaction times.

What could go wrong?

What will be the policies of a Lagarde run ECB?

We face something of a new era in central banking as the announcement of the former French Finance Minister Christine Lagarde as the next President of the European Central Bank poses a problem. This is exacerbated by the fact that the former Spanish Finance Minister Luis De Guindos was appointed at the Vice-President of the ECB in March last year. So as you can see these roles seem to be becoming a nice retirement present for former finance ministers which poses a clear problem when the ECB was set up to avoid them running monetary policy!

Central banks have not always been independent, but over time there has been a clear trend towards separating monetary policy from direct political influence……… If governments had direct control over central banks, politicians could be tempted to change interest rates in their favour to create short-term economic booms or use central bank money to finance popular policy measures. ( ECB)

The spinning involved here is an example of the military dictum that the best place to hide something is in plain sight. This particularly matters if we consider the issue of QE ( Quantitative Easing ) bond buying which relies on the separation of the central bank and the treasury (treasuries in this case). Otherwise the treasury may just buy its own bonds meaning we would have a literal case of money printing.

Monetary Policy

There are three routes which will give us a clue as to what the Lagarde era will bring.

The first is the likelihood that she will inherit policy which has just been eased again. As we have been analysing the present President Mario Draghi intends to go out with something of a bang. So a further cut in the Deposit Rate from the present -0.4% is on the cards with some extra QE as well. I do not know if he got wind of the next President and decided to set monetary policy for the early part of the next term but it certainly feels like that now. Personally I find it hard to take a cut from -0.4% to -0.5% seriously as exactly is the extra -0.1% expected to achieve?

Next comes some research which was published this February whilst she was Managing Director of the IMF.

In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds.

This is especially relevant to a central bank which has sailed into the next slow down with interest-rates still negative. Then the advent of something like Libra starts to look potentially rather sinister.

The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money.

This all seems a little odd but as Al Pacino tells us in Carlito’s Way, here comes the pain.

To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today. Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year. The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in your bank account. If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.

It is all very involved and they do not put it like this but those with cash are being taxed. At no point does anyone question why we need such negative interest-rates? After all we have had loads of interest-rate cuts and by definition they have not worked or we would not need ever more of them. So why would this work? It plainly fails the Einstein critique which defines madness as doing the same thing but expecting a different result.

Philip Lane

Not a well known name outside of Ireland but the previous Governor of the Irish central bank is now the chief economist of the ECB. As his two superiors have little experience or expertise in monetary policy ( I recall Mario Draghi once saying he would find a job for De Guidos when they could find a job he could do….) the role of chief economist just got much more important. On Tuesday in Helsinki he updated us on his thoughts.

 As will be explained in the analysis, my assessment is that the evidence shows that our package of monetary policy measures has been an effective response to the environment that the ECB has faced in recent years.

So effective in fact that in spite of negative interest-rates and a bloated balance sheet it has slowing economic growth and inflation below target. Yet we are told everything is working just fine.

To illustrate the effectiveness of negative policy rates, ECB staff undertook a counterfactual exercise………The evidence shows that our enhanced forward guidance has been effective……According to those estimates, after the last recalibration of the APP in June 2018, the ten-year bond yield would have been around 95 basis points higher in the absence of the APP. Moreover, this impact is quite persistent……..In fact, our experience with previous TLTROs (TLTRO I and II) was that these operations had a significant effect on funding costs, particularly in more vulnerable euro area countries. Moreover, the lower funding costs were passed through to customers

Now I do not know about you but after around 5 years of something why can’t you look at what negative interest-rates have achieved rather than running a simulation? Also if lower bond yields were an economic nirvana the Euro area would be in a form of economic rapture right now. Ditto for the bank subsidy TLTROs. I suppose as Chief Economist he has to claim that people take note of Forward Guidance but I also note that even he does not claim it goes beyond financial markets. Quite how the ordinary person is supposed to respond to something they have never heard of gets omitted.

But after all the psychobabble we get the punch line. It is to be “More! More! More!”

Our assessment is that this policy package has been effective and further easing can be provided if required to deliver our mandate.


As you can see the mood music is all on one direction. Christine Lagarde headed an organisation which has pushed for higher inflation targets and even deeper negative interest-rates. It seems that her arrival will follow new QE purchases which will cause the need for more “innovation” because under the present rules there are not so many left to buy. So there are roads ahead where she will announce the buying of equities and corporate property like in Japan. Markets seem to have got the gist as I note that the ten-year yield in Germany has fallen below the -0.4% Deposit Rate of the ECB this morning. Buy bonds today and sell them to Christine later seems to be the name of the game right now.

The music must never stop even though after all this time even the most credulous must surely ask why we never seem to escape from the economic malaise?

So it is not only in the sphere of corruption that the song below from the Stranglers is appropriate.

Nice ‘N’ Sleazy
Nice ‘N’ Sleazy
Does It Does It
Does It Every Time
Nice ‘N’ Sleazy
Nice ‘N’ Sleazy
Does It Does It
Does It Every Time
Nice ‘N’ Sleazy Does It

I would imagine I am not the only person wondering how banking fraud will be dealt with on her watch?

The Investing Channel