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

 

The ECB now considers fiscal policy via QE to be its most effective economic weapon

Yesterday saw ECB President Christine Lagarde give a speech to the European Parliament and it was in some ways quite an extraordinary affair. Let me highlight with her opening salvo on the Euro area economy.

Euro area growth momentum has been slowing down since the start of 2018, largely on account of global uncertainties and weaker international trade. Moderating growth has also weakened pressure on prices, and inflation remains some distance below our medium-term aim.

In the circumstances that is quite an admittal of failure. After all the ECB has deployed negative interest-rates with the Deposit Rate most recently reduced to -0.5% and large quantities of QE bond buying. No amount of blaming Johnny Foreigner as Christine tries to do can cover up the fact that the switch to a more aggressive monetary policy stance around 2015 created what now seems a brief “Euro boom” but now back to slow and perhaps no growth.

But according to Christine the ECB has played a stormer.

 The ECB’s monetary policy since 2014 relies on four elements: a negative policy rate, asset purchases, forward guidance, and targeted lending operations. These measures have helped to preserve favourable lending conditions, support the resilience of the domestic economy and – most importantly in the recent period – shield the euro area economy from global headwinds.

It is hard not to laugh at the inclusion of forward guidance as a factor as let’s face it most will be unaware of it. Indeed some of those who do follow it ( mainstream economists) started last year suggesting there would be interest-rate increases in the Euro area before diving below the parapet. There seems to be something about them and the New Year because we saw optimistic forecasts this year too which have already crumbled in the face of an inconvenient reality. Moving on you may note the language of of “support” and “helped” has taken a bit of a step backwards.

Also as Christine has guided us to 2018 we get a slightly different message now to what her predecessor told us as this example from the June press conference highlights.

This moderation reflects a pull-back from the very high levels of growth in 2017, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level, as well as weaker impetus from external trade.

As you can see he was worried about the domestic economy too and mentioned it first before global and trade influences. This distinction matters because as we will come too Christine is suggesting that monetary policy is not far off “maxxed out” as Mark Carney once put it.

For balance whilst there is some cherry picking going on below I welcome the improved labour market situation.

Our policy stimulus has supported economic growth, resulting in more jobs and higher wages for euro area citizens. Euro area unemployment, at 7.4%, is at its lowest level since May 2008. Wages increased at an average rate of 2.5% in the first three quarters of 2019, significantly above their long-term average.

Although it is hard not to note that the level of wages growth is worse than in the US and UK for example and the unemployment rate is much worse. You may note that the rate of wages growth being above average means it is for best that the ECB is not hitting its inflation target. Also we get “supported economic growth” rather than any numbers, can you guess why?

Debt Monetisation

You may recall that one of the original QE fears was that central banks would monetise government debt with the text book example being it buying government bonds when they were/are issued. This expands the money supply ( cash is paid for the bonds) leading to inflation and perhaps hyper-inflation and a lower exchange-rate.

What we have seen has turned out to be rather different as for example QE has led to much more asset price inflation ( bond, equity and house prices) than consumer price inflation. But a sentence in the Christine Lagarde speech hints at a powerful influence from what we have seen.

 Indeed, when interest rates are low, fiscal policy can be highly effective:

Actually she means bond yields and there are various examples of which in the circumstances this is pretty extraordinary.

Another record for Greece: 10 yr government bonds fall below 1% for the first time in history (from almost 4% a year ago)  ( @gusbaratta )

This is in response to this quoted by Amna last week.

 “If the situation continues to improve and based on the criteria we implement for all these purchases, I am relatively convinced that Greek bonds will be eligible as well.” Greek bonds are currently not eligible for purchase by the ECB since they are not yet rated as investment grade, one of the basic criteria of the ECB.

Can anybody think why Greek bonds are not investment grade? There is another contradiction here if we return to yesterday’s speech.

Other policy areas – notably fiscal and structural polices – also have to play their part. These policies can boost productivity growth and lift growth potential, thereby underpinning the effectiveness of our measures.

Because poor old Greece is supposed to be running a fiscal surplus due to its debt burden, so how can it take advantage of this? A similar if milder problem is faced by Italy which you may recall was told last year it could not indulge in fiscal policy.

The main target in President Lagarde’s sights is of course Germany. It has plenty of scope to expand fiscal policy as it has a surplus. It would in fact in many instances actually be paid to do so as it has a ten-year yield of -0.37% as I type this meaning real or inflation adjusted yields are heavily negative. In terms of economics 101 it should be rushing to take advantage of this except we see another example of economic incentives not achieving much at all as Germany seems mostly oblivious to this. There is an undercut as the German economy needs a boost right now. Although there is another issue as it got a lower exchange rate and lower interest-rates via Euro membership now if it uses fiscal policy and that struggles too, what’s left?

Mission Creep

If things are not going well then you need a distraction, preferably a grand one

We also have to gear up on climate change – and not only because we care as citizens of this world. Like digitalisation, climate change affects the context in which central banks operate. So we increasingly need to take these effects into account in central banks’ policies and operations.

Readers will disagree about climate change but one thing everyone should be able to agree on is that central bankers are completely ill equipped to deal with the issue.

Comment

This morning’s release from Eurostat was simultaneously eloquent and disappointing.

In December 2019 compared with November 2019, seasonally adjusted industrial production fell by 2.1% in the
euro area (EA19)……In December 2019 compared with December 2018, industrial production decreased by 4.1% in the euro area……The average industrial production for the year 2019, compared with 2018, fell by 1.7% in the euro area

The index is at 100.6 so we are nearly back to 2015 levels as it was set at 100 and we have the impact of the Corona Virus yet to come. Actually we can go further back is this is where we were in 2011. Another context is that the Euro area GDP growth reading of 0.1% will be put under pressure by this.

In a nutshell this is why the ECB President wants to discuss things other than monetary policy as even central bankers are being forced to discuss this.

 We are fully aware that the low interest rate environment has a bearing on savings income, asset valuation, risk-taking and house prices. And we are closely monitoring possible negative side effects to ensure they do not outweigh the positive impact of our measures on credit conditions, job creation and wage income.

But central bankers are creatures of habit so soon some will be calling for yet another interest-rate cut.

Let me finish with some humour.

Governors had to stop trashing policy decisions once taken and keep internal disputes out of the media, presenting a common external front, 11 sources — both critics and supporters of the ECB’s last, controversial stimulus package — told Reuters.

Yep, the ECB has leaked that there are no leaks….

 

 

 

The ECB Review should put house prices in its inflation measure

Today brings the Euro area and European Central Bank into focus as the latter announces its policy decision. In terms of a change today I am not expecting anything as policy was set for the early part of the tenure of Christine Lagarde as ECB President by her predecessor Mario Draghi when he cut the main interest-rate to -0.5% and restarted QE bond purchases late last year. If you think about it that was quite revelaing as to what Mario thought about the capabilities of his “good friend” Christine. But whilst the surface may be quiet there is quite a bit going on underneath as highlighted by this from the Financial Times.

Lagarde’s legacy building begins at the ECB

I would say that this is an extraordinary level of sycophancy but then this is standard for the FT which of course called Bank of England Governor a “rock star”. Still I guess the media have to compete for priority at the various press conferences. After all the idea was a classic political style tactic of playing for time. But the catch is that it seems likely to end up with actual changes just as the time when the ECB is at its most intellectually lightweight. Also there is something of a swerve in that the ECB is in effect being allowed to set its own exam paper. Most of us wish we could have done that at school, college and university! More seriously central bank mandates are supposed to be set by elected politicians. Now whilst the ECB is headed by politicians these days ( Lagarde and De Guindos) they have been appointed rather than elected.

What is going on?

This is really extraordinary stuff because if you think about it Mario Draghi acquired a legacy by responding to events ( Whatever it takes to save the Euro…) whereas wht we have now is self-chosen as described above,

 Every good central banker needs a legacy. Mario Draghi, the former head of the European Central Bank, is widely credited with rescuing the eurozone from a debt crisis. Today his successor, Christine Lagarde, will kick off the search for a defining cause of her own.

Also this “Every good central banker needs a legacy” provokes the question why? Before we note that this is very damning of a former FT favourite Mark Carney who is leaving without one.

Oh and did I mention buying time?

Ms Lagarde will launch the second strategic review in the 20-year history of the ECB — a process that she has said will last until December as it turns “every stone” in search of ways to fine tune its monetary policy toolkit.

Also just like we have seen in various wars if your main priority is going badly it is time for some mission creep.

One of the most controversial ideas Ms Lagarde has proposed for the review is to make tackling climate change a “mission-critical” priority of the ECB. It is easy to see why this idea appeals to Ms Lagarde, with extreme weather events increasing in frequency and intensity every year — the latest being the wildfires raging across Australia — and pushing green issues to the top of the political agenda.

Indeed it is with the Euro area economy struggling. A diversion is badly needed.

With the Ivory Tower style economic modelling in so much trouble you might think this is really rather cruel and heartless.

For a start, the ECB could integrate climate-related risks into all its modelling and take more account of them when valuing collateral it accepts from financial institutions, as proposed by Banque de France governor François Villeroy de Galhau.

Collateral is a potentially explosive issue as the Bank of England discovered early in the credit crunch when it found that it had received “Phantom Securities” ( the clue is in the name). This is even more likely in a fashionable cause such as climate change.

A problem with this is that it would lead to central bankers choosing which stocks to favour which even the equity loving Tokyo Whale tries to avoid.

Environmental campaigners are calling on the ECB to do even more and repurpose its €2.6tn asset-purchase programme, known as quantitative easing (QE), by divesting “brown” bonds issued by carbon-intensive companies while increasing purchases of green bonds…….Critics say it is up to politicians, not central banks, to decide which companies to favour and which to penalise.

Meanwhile back on the day job.

Growth expectations have been scaled down.

If we switch to CNBC we see something which is quite damning for an ECB which has been so expansionist and interventionist. After negative interest-rates and all the QE this is the result.

Monetary policy action in Frankfurt is not expected by some market watchers for the whole of 2020. With inflation sluggish and no real economic rebound in sight, the majority of economists expect the ECB to adopt a “wait and see” approach.

The International Perspective

This matters on an international perspective as has been revealed by the head of the Swiss National Bank today.

“We know that negative rates also have side effects, that is the reason why we changed the threshold,” Jordan told CNBC, referring to the SNB raising the limit before the charge of -0.75% applied to commercial bank deposits at the central bank.

That is an awkward one for Christine Lagarde to mull as she imposes negative interest-rates but there is more.

ordan’s colleague Andrea Maechler said on Wednesday the SNB would end negative interest rates “as soon as we are able,” when asked about the central bank’s ultra-loose monetary policy aimed at curbing the Swiss franc’s over-valuation.

In essence it is the ECB that runs Swiss monetary policy as another ECB interest-rate cut seems likely to push the SNB to -1% as an official interest-rate. There is a similar state of play in Denmark. As to Sweden it’s central bank has been something of an unguided missile in the way it has raised interest-rates into an economic slow down so who knows what it will do next?

Comment

The opening issue is how did the ECB end up with its review being headed by someone known for incompetence ( Greece and then Argentina) as well as having a conviction for negligence in a fraud case?

Perhaps the fact above is related to a state of pay where nobody seems to be discussing the actual mandate or what we might call the day job. This is to keep consumer inflation as defined by HICP ( what we call CPI in the UK) below but close to 2% per annum. This was later refined by former President Jean-Claude Trichet to 1.97%, mostly because that is what it averaged in his watch.

There is a warning there because the apparent success on Trichet’s watch was combined with the credit crunch. Ooops! More specifically there were the house price booms and then busts in Spain and Ireland in particular. This allows me to suggest a fix which is to put house prices in the inflation index to help avoid that occurring again. Also it would represent not only a tightening of policy but adding an area that somehow they have managed to mean to include but forget for two decades now. Otherwise they had better keep playing Elvis on their loudspeakers.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

What more can the ECB do for the Euro?

Yesterday in something of a set piece event the new ECB President Christine Lagarde got out her pen to sign some banknotes and in the midst of her soaring rhetoric there were some interesting numbers.

In the euro area, banknotes are used for retail transactions more than any other means of payment. Some 79% of all transactions are carried out using cash, amounting to more than half of the total value of all payments.

So cash may no longer be king but it is still an important part of the Euro area economy. Indeed the numbers below suggest it may be an increasingly important part, perhaps driven by the fact that 0% is indeed better than the -0.5% deposit rate of the ECB.

And since their introduction, the number of euro banknotes in circulation has risen steadily, reflecting both the importance of cash in our economy and the euro’s international appeal. There are now 23 billion euro banknotes in circulation with a value of €1.26 trillion – a third of which are being used outside the euro area.

The latter reflection on use outside the Euro area is a rise because if we look elsewhere on the ECB website we are told this.

It is estimated that, in terms of value, between 20% and 25% of the euro banknotes in circulation are held outside the euro area, mainly in the neighbouring countries. The demand for euro banknotes rose steeply particularly in non-EU countries in eastern Europe when the financial crisis erupted in 2008 and national currencies depreciated against the euro.

We can figure out what was going on there as we recall the carry trade leading to mortgages and business borrowing being undertaken in Euros ( and Swiss Francs) in Eastern Europe. I guess that left some with a taste for the adventures of Stevie V.

Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

I am not sure as to why the foreign holdings have risen so much. Some will no doubt cheer lead saying it is a sign of Euro acceptance and strength but there is the issue of notes being potentially used by money launderers and drug smugglers. The ECB is supposed to be against such criminal activity and has used that reason in its ending of production of 500 Euro notes.The circulation of them is in a gentle decline and there are now 458 million of them. The numbers of 200 Euro notes has shot higher as there were 253 million a year ago as opposed to 366 million ( and rising) now.

I did ask the ECB and they pointed me towards this.

Euro cash holdings are widespread in Albania, Croatia, the Czech Republic, the Republic of North Macedonia and Serbia. In those five countries, an average of 36% of respondents reported holding euro cash……..

That still leaves a fair bit unanswered.

Money Supply

There was some good news for the Euro area economic outlook earlier from this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 8.4% in October from 7.9% in September.

Here we are adding some electronic money to the cash above and we can see that the upwards trend seen in 2019 has been reinstated after last month’s dip. Or if you prefer we have returned to August!

This gives an explanation of how the services sector has held up as the trade war has hit manufacturing. According to the Markit PMI surveys this is especially true in France.

Service sector growth continued to run at one of the highest
recorded over the past year.

The Euro area and the ECB should be grateful for this as according to Matkit even with the monetary growth things in this quarter are weak.

“The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
third quarter.”

If we switch to the longer-term outlook we see this.

The annual growth rate of the broad monetary aggregate M3 stood at 5.6% in October 2019, unchanged from the previous month, averaging 5.6% in the three months up to October.

I think we get the idea that it is 5.6%! Anyway as we know M1 rose the wider sectors must have fallen.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 0.6% in October from 1.2% in September. The annual growth rate of marketable instruments (M3-M2) was -2.4% in October, compared with -1.1% in September.

The growth rate of 5.6% suggests a better economic outlook for 2021 and head but there is a catch which is this.

 net external assets contributed 3.0 percentage points (up from 2.8 percentage points)

The external influence has been growing over the past year or so and if we subtract it then broad money growth is a mere 2.6% and flashing a warning.

Official Surveys

Today’s releases were upbeat.

In November 2019, the Economic Sentiment Indicator (ESI) increased slightly in both the euro area (by 0.5 points to
101.3) and the EU (by 0.9 points to 100.0)……Amongst the largest euro-area economies, the ESI increased in Spain (+0.7), France and Germany (both by +0.4), while it remained virtually unchanged in Italy (-0.1) and worsened in the Netherlands (−1.0).

However there was another sign of trouble,trouble,trouble for manufacturing.

According to the bi-annual investment survey carried out in October/November this year, real investment in the
manufacturing industry in 2019 is expected to decrease by 2% in both the euro area and the EU. Compared to the
previous survey conducted in March/April this year, this represents a downward revision by 6 and 5 percentage
points for the euro area and the EU, respectively. For 2020, managers expect an increase in real investment by 1%
in both regions.

Care is needed with this series though because if you believed it wholesale Germany would be having a good year economically.

Comment

The ECB finds itself at something of a crossroads.Some elements here are simple as with a weak economy and blow target inflation then its policy easing looks justified.It does not seem to have many monetarists on board but it could easily argue that monetary growth is supporting the economy.

The more difficult elements come from how quickly it had to ease policy again as the ceasefire only lasted around ten months. This then brings into focus the question of why economic growth has been so weak? One way it is trying to answer this is provided by the way it has replaced someone who sometimes behaved like a politician with an actual one which suggests a bigger effort in this area.

“Countries with fiscal space should use it quickly, even more so when they suffer an asymmetric shock like Germany,” Villeroy told the Europlace international forum in Tokyo. “Those with high public debt should make their public finances more growth-friendly. ( Reuters)

Some of this is more French trolling of Germany but France has been more in favour of fiscal policy all along. As a side-effect by providing more bunds for the ECB to buy more fiscal policy from Germany would allow another expansion of monetary policy.

That leaves us with a curiosity that may become the equivalent of a singularity. Central banks have failed in the credit crunch era yet their importance rises and especially in the Euro area they seem to feel it is their role to dictate to politicians,

 

 

 

Christine Lagarde trolls Germany and asks for more fiscal stimulus

This morning has seen the first set piece speech of the new ECB President Christine Lagarde and it would not be her without some empty rhetoric.

The idea of European renewal may, for some, elicit feelings of cynicism. We have heard it many times before: “Europe is at a crossroads”; “now is Europe’s moment”. Often that has not proven to be the case. But this time does in fact seem different.

To her perhaps, just like the Greek bailout was “shock and awe” which I suppose in the end it was just as a doppelganger of what she meant.

We also got some trolling of Germany.

Ongoing trade tensions and geopolitical uncertainties are contributing to a slowdown in world trade growth, which has more than halved since last year. This has in turn depressed global growth to its lowest level since the great financial crisis.

These uncertainties have proven to be more persistent than expected, and this is clearly impacting on the euro area. Growth is expected to be 1.1% this year, i.e. 0.7 percentage points lower than we projected a year ago

A lot of the reduction and impact has been on Germany but what Christine does not say is that this has become a regular Euro area issue where economic growth has been downgraded or poor or both. Briefly around 2017 we had the Euro boom but that required the monetary taps to be wide open. Missing here in the analysis is the fact that the stimulus was withdrawn into a growth slowdown.

Did I say there was some trolling of Germany?

At the same time, there are also changes of a more structural nature. We are starting to see a global shift – driven mainly by emerging markets – from external demand to domestic demand, from investment to consumption and from manufacturing to services.

Then we move onto rhetoric that is simply misleading.

The answer lies in converting the world’s second largest economy into one that is open to the world but confident in itself – an economy that makes full use of Europe’s potential to unleash higher rates of domestic demand and long-term growth.

She is setting policy for the Euro area and not Europe and the ECB itself tells us this about the Euro area.

Compared with its individual member countries, the euro area is a large and much more closed economy. In terms of its share of global GDP, it is the world’s third-largest economy, after the United States and China.

Economics

It is revealing that the next section was titled “resilience and rebalancing” words which these days send a bit of a chill down the spine. This chill continues as we see a call for this.

And when global growth falls, stronger internal demand can help protect jobs, too. This is because domestic demand is linked more to services – which are more labour-intensive – while external demand is linked more to manufacturing, which is less labour-intensive.

We are seeing that shield in action in the euro area today: the resilience of services is the key reason why employment has not yet been affected by the global manufacturing slowdown.

The word “yet” may turn out to be rather important. Also there is a catch which is sugar coated..

In the euro area, domestic demand has contributed to the recovery, helping to create 11.4 million new jobs since mid-2013.

But then reality intervenes.

But over the past ten years, domestic demand growth has been almost 2 percentage points lower on average than it was in the decade before the crisis, and it has been slower than that of our main trading partners.

In addition there is a problem.

The ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place.

This is highlighted if we think what Euro area domestic demand would have been without all the ECB stimulus. Her predecessor Mario Draghi suggested that this was in the area of a 2% boost to both GDP and inflation. I guess Christine left that out as it would be too revealing, or it could be that she is simply unaware of it.

A Double Play

The space for monetary policy is limited as Mario Draghi in what I think was a revealing move tied the new ECB President’s hands for a bit by resuming QE ( 20 billion Euros a month) and cutting the deposit rate to -0.5%. So we are left with what some might call interference in politics.

One key element here is euro area fiscal policy, which is not just about the aggregate stance of public spending, but also its composition. Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply.

The problem is defining what investment is and which bits are  genuinely useful. For example I recall in the Euro area crisis the example of new toll roads in Portugal which were empty because people could not afford them.

However as with some many central bankers these days Christine firmly presses the climate change klaxon.

While investment needs are of course country-specific, there is today a cross-cutting case for investment in a common future that is more productive, more digital and greener.

There is a clear problem below if we look at growth prospects in the light of this speech alone.

But a stronger domestic economy also rests on higher business investment, and for that raising productivity is equally important. Firms need to be confident in future growth if they are to commit long-range capital.

Because as even Christine is forced to admit the US has done better in this area.

Though all advanced economies are facing a growth challenge, the euro area has been slower to embrace innovation and capitalise on the digital age than others such as the United States. This is also reflected in differences in total factor productivity growth, which has risen by only half as much in the euro area as it has in the United States since 2000.

How do we deal with this? Well she is a politician so bring out some large numbers that most will immediately forget.

And the projected gains are significant: new studies find that the full implementation of the Services Directive would lead to gains in the order of €380 billion], while completing the digital single market would yield annual benefits of more than €170 billion.

Comment

The most revealing part of all this is below as you know you are in trouble when politicians start talking about opportunities.

We have a unique possibility to respond to a changing and challenging world by investing in our future, strengthening our common institutions and empowering the world’s second largest economy.

Maybe by the next speech someone will have told her it is the third largest. Also what growth and why has it not be tried over the past 20 years?

In this way, we could tap into new sources of growth that would otherwise be suppressed.

Let me switch tack and welcome a new female head of a central bank but if we look at the other main example we see yet another problem. Here is Janet Yellen on CNBC.

“Some of the most disturbing notes came from people who said, ’I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing,” Yellen recalled. “Savers are getting penalized. It’s true.”

This is even more true in the Euro area as we looked at on Tuesday but Lagarde  just skates by.

fewer side effects

The problem has been highlighted this morning by the Markit PMI business surveys.

The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
third quarter.

Another nuance is that you can read the speech as in essence the French trolling Germany which seems to be a theme these days and a source of Euro area friction.

Also if we look at money markets there may be trouble ahead.

SPIKE IN ECB’S NEW OVERNIGHT RATE ESTR THIS WEEK SPARKED BY REGULAR CONTINGENCY PLANNING BY FRENCH BANKS – TRADERS  ( @PriapusIQ )

Why the 20th of the month?

We end by returning to an all too familiar theme, why do we always need stimulus?

 

 

 

Where will Christine Lagarde lead the ECB?

We find ourselves in a new era for monetary policy in the Euro area and it comes in two forms. The first is the way that the pause in adding to expansionary monetary policy which lasted for all of ten months is now over. It has been replaced by an extra 20 billion Euros a month of QE bond purchases and tiering of interest-rates for the banking sector. The next is the way that technocrats have been replaced by politicians as we note that not only is the President Christine Lagarde the former Finance Minister of France the Vice-President Luis de Guindos is the former Economy Minister of Spain. So much for the much vaunted independence!

Monetary Policy

In addition to the new deposit rate of -0.5% Mario Draghi’s last policy move was this.

The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP), i.e. the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP), at a monthly pace of €20 billion as from 1 November 2019.

It is the online equivalent of a bit of a mouthful and has had a by now familiar effect in financial markets. Regular readers will recall mt pointing out that the main impact comes before it happens and we have seen that again. If we use the German ten-year yield as our measure we saw it fall below -0.7% in August and September as hopes/expectations of QE rose but the reality of it now sees the yield at -0.3%. So bond markets have retreated after the pre-announcement hype.

As to reducing the deposit rate from -0.4% to -0.5% was hardly going to have much impact so let us move into the tiering which is a way of helping the banks as described by @fwred of Bank Pictet.

reduces the cost of negative rates from €8.7bn to €5.0bn (though it will increase in 2020) – creates €35bn in arbitrage opportunities for Italian banks – no signs of major disruption in repo, so far.

Oh and there will be another liquidity effort or TLTRO-III but that will be in December.

There is of course ebb and flow in financial markets but as we stand things have gone backwards except for the banks.

The Euro

If we switch to that we need to note first that the economics 101 theory that QE leads to currency depreciation has had at best a patchy credit crunch era. But over this phase we see that the Euro has weakened as its trade weighted index was 98.7 in mid-August compared to the 96.9 of yesterday. As ever the issue is complex because for example my home country the UK has seen a better phase for the UK Pound £ moving from 0.93 in early August to 0.86 now if we quote it the financial market way.

The Economy

The economic growth situation has been this.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area in the third quarter of 2019 ( Eurostat)

As you can see annual economic growth has weakened and if we update to this morning we were told this by the Markit PMI business survey.

The IHS Markit Eurozone PMI® Composite
Output Index improved during October, but
remained close to the crucial 50.0 no-change mark.
The index recorded 50.6, up from 50.1 in
September and slightly better than the earlier flash
reading of 50.2, but still signalling a rate of growth
that was amongst the weakest seen in the past six and-a-half years.

As you can see there was a small improvement but that relies on you believing that the measure is accurate to 0.5 in reality. The Markit conclusion was this.

The euro area remained close to stagnation in
October, with falling order books suggesting that
risks are currently tilted towards contraction in the
fourth quarter. While the October PMI is consistent
with quarterly GDP rising by 0.1%, the forward looking data points to a possible decline in economic output in the fourth quarter.

As you can see this is not entirely hopeful because the possible 0.1% GDP growth looks set to disappear raising the risk of a contraction.

I doubt anyone will be surprised to see the sectoral breakdown.

There remained a divergence between the
manufacturing and service sectors during October.
Whereas manufacturing firms recorded a ninth
successive month of declining production, service
sector companies indicated further growth, albeit at
the second-weakest rate since January.

Retail Sales

According to Eurostat there was some good news here.

In September 2019 compared with August 2019, the seasonally adjusted volume of retail trade increased by 0.1% in the euro area (EA19). In September 2019 compared with September 2018, the calendar adjusted retail sales index increased by 3.1% in the euro area .

The geographical position is rather widespread from the 5.2% annual growth of Ireland to the -2.7% of Slovakia. This is an area which has been influenced by the better money supply growth figures of 2019. This has been an awkward area as they have often been a really good indicator but have been swamped this year by the trade and motor industry problems which are outside their orbit. Also the better picture may now be fading.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

In theory it should rally due to the monthly QE but in reality it is far from that simple as M1 growth picked up after the last phase of QE stopped.

Comment

As you can see there are a lot of challenges on the horizon for the ECB just at the time its leadership is most ill-equipped to deal with them. A sign of that was this from President Lagarde back in September.

“The ECB is supporting the development of such a taxonomy,” Lagarde said. “Once it is agreed, in my view it will facilitate the incorporation of environmental considerations in central bank portfolios.” ( Politico EU)

Fans of climate change policies should be upset if they look at the success record of central banks and indeed Madame Lagarde. More prosaically the ECB would be like a bull in a China shop assuming it can define them in the first place.

More recently President Lagarde made what even for her was an extraordinary speech.

There are few who have done so much for Europe, over so long a period, as you, Wolfgang.

This was for the former German Finance Minister Wolfgang Schauble. Was it the ongoing German current account surplus she was cheering or the heading towards a fiscal one as well? Perhaps the punishment regime for Greece?

As to the banks there were some odd rumours circulating yesterday about Deutsche Bank. We know it has a long list of problems but as far as I can tell it was no more bankrupt yesterday than a month ago. Yet there was this.

Mind you perhaps this is why Germany seems to be warming towards a European banking union…..

Christine Lagarde has left another economic disaster behind her in Argentina

One of the rules of modern life is that the higher up the chain you are or as Yes Prime Minster put it “the greasy pole” the less responsible you are for anything. A clear example of that is currently Christine Lagarde who is on here way to becoming the next President of the European Central Bank and found her competence being praised to the heavens in some quarters. Yet the largest ever IMF programme she left behind continues to fold like a deckchair. From the Argentina central bank or BCRA this morning via Google Translate.

Measures to protect exchange-rate stability and the saver

There are two immediate perspectives. The first is that we need to translate the announcement which suggests as a minimum a modicum of embarrassment. Next when central banks tell you that you are being protected it is time to think of the strap line of the film The Fly.

Be Afraid, Be Very Afraid

Let us look at the detail.

The measure establishes that exporters of goods and services must liquidate their foreign exchange earnings in the local market……Resident legal entities may purchase foreign currency without restrictions for the importation or payment of debts upon expiration, but they will need compliance from the Central Bank of the Argentine Republic to purchase foreign exchange for the formation of external assets, for the precancelation of debts, to turn abroad profits and dividends and make transfers abroad.

So some restrictions on businesses and here are the ones on the public.

Humans will not have any limitations to buy up to USD 10,000 per month and will need authorization to buy amounts greater than that amount. Transactions that exceed USD 1,000 must be made with a debit to an account in pesos, since they cannot be carried out in cash. Nor will it be allowed to transfer funds from accounts abroad of more than USD 10,000 per person per month. Except between accounts of the same owner: in this case there will be no limitations.

If you are not Argentinian then the noose is a fair bit tighter.

Non-resident human and legal persons may purchase up to USD 1,000 per month and may not transfer funds from dollar accounts abroad.

What about the debt?

We need a bit of reprogramming here after all it has been party-time for bondholders in most of the world. However as Reuters points out not in Argentina.

Standard & Poors announced on Thursday that it was slashing Argentina’s long-term credit rating another three notches into the deepest area of junk debt, saying the government’s plan to “unilaterally” extend maturities had triggered a brief default. The ratings agency said it would consider Argentina’s long-term foreign and local currency issue ratings as CCC- “vulnerable to nonpayment” – starting on Friday following the government’s Wednesday announcement that it wants to “re-profile” some $100 billion in debt.

That’s more than a bit awkward for those who bought the 100 year bond which was issued in 2017. It was also rather difficult for the IMF which seems to have found itself in quicksand.

By the time Treasury Minister Hernan Lacunza said on Wednesday that the government wanted to extend maturities of short-term debt, and would negotiate new time periods for loans to be paid back to the International Monetary Fund, a debt revamp was already widely expected.

We will have to see how the century ( now 98 year ) bond does but after being issued at 85 it traded at 38 last week. In a sign of the times even the benchmark bond which in theory pays back 100 in 2028 did this.

The January 2028 benchmark briefly dropped under 40 cents for the first time ever before edging up to trade at 40.3.

For perspective Austria also issued a century bond at a similar time and traded at 202 last week.

The Peso

Back on August 12th I pointed out that it took 48.5 Pesos to buy a single US Dollar ahead of the official opening. Things went from bad to worse after the official opening with the currency falling into the mid-50s in a volatile market. On Friday it closed at 59.5 and that was after this.

The central bank has burnt through nearly $1 billion in reserves since Wednesday in an effort to prop up the peso. But the intervention did not have the desired impact and risk spreads blew out to levels not seen since 2005, while the local peso currency extended its year-to-date swoon to 36%. ( Reuters ).

If we stay with the issue of reserves I note that the BCRA itself tells us that as of last Wednesday it had US $57 billion left as opposed to this from my post on August 12th.

But staying with the central bank maybe it will be needing the US $66.4 billion of foreign exchange reserves.

I was right and the nuance here is shown by how little of the reserves were actually deployable in a crisis. We know 14% were used and at most 20% have now been used yet policy has been forced to change. That is a common theme of a foreign exchange crisis you only end up being able to use if I an generous half of your reserves before either you press the panic button or someone does it for you.

Interest-Rates

Here we see another departure from the world-wide trend as rather than falls we are seeing some eye-watering levels. Back on August 12th I noted an interest-rate of 63.71% whereas now it is 83.26%. This provides another perspective on the currency fall because you get quite decent return for these times if you can merely stay in the Peso for a week or two.

As for the domestic economy such an interest-rate must be doing a lot of damage because of the length of time this has lasted for as well as the number now.

Comment

As recently as June 7th last year the IMF announced this.

The Argentine authorities and IMF staff have reached an agreement on a 36-month Stand-By Arrangement (SBA) amounting to US$50 billion (equivalent to about SDR 35.379 billion or about 1,110 percent of Argentina’s quota in the IMF).

The amount has been raised since presumably because of the rate of access of funds. If you look at the IMF website it has already loaned just short of 33 billion SDRs. Meanwhile here is some gallows humour from back then.

The authorities have indicated that they intend to draw on the first tranche of the arrangement but subsequently treat the loan as precautionary.

As Christine Lagarde was cheerleading for this she did get one thing right.

I congratulate the Argentine authorities on reaching this agreement

They kept themselves in power with the help of IMF funds. That has not gone so well for the Argentine people not the shareholders of the IMF. There are similarities here with the debacle in Greece where of course Christine Lagarde was heavily involved in the “shock and awe” bailout that contributed to an economic depression. For example as 2018 opened the IMF forecast 2.5% economic growth for it and 2.8% this year as opposed to the reality of the numbers for the first quarter being 5.8% lower than a year before.

Yet as recently as April she was telling us this.

When the IMF completed its third review of Argentina’s economy in early April, managing director Christine Lagarde boasted that the government policies linked to the country’s record $56bn bailout from the fund were “bearing fruit”.

It is not an entirely isolated event as we look at other IMF programmes.

Pakistan Rupee -4.83% seems IMF’s (Lagarde’s) lesser-known second success story. Eurozone you are next up ( @Sunchartist )

But the official view has been given by Justin Trudeau of Canada who has described Christine Lagarde as a “great global leader.”

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