The ECB hints at buying equities and replacing bank intermediation

A feature of this virus pandemic is the way that it seems to have infected central bankers with the impact of them becoming power mad as well as acting if they are on speed. Also they often seen lost in a land of confusion as this from yesterday from the Governor of the Bank of France highlights.

Naturally, there is a huge amount of uncertainty over how the economic environment will evolve, but this is probably less true for inflation.

Okay so the picture for inflation is clearer, how so?

 In the short term, the public health crisis is disinflationary, as exemplified by the drop in oil prices. Inflation is currently very low, at 0.3% in the euro area and 0.4% in France in April; granted, it is particularly tricky to measure prices in the wake of the lockdown, due to the low volume of data reporting and transactions, and the shift in consumer habits, temporary or otherwise.

This is not the best of starts as we see in fact that one price has fallen ( oil) but many others are much less clear due to the inability to measure them.Of course having applied so much monetary easing Francois Villeroy is desperate to justify it.

The medium-term consequences are more open to debate, due notably to uncertainties over production costs, linked for example to health and environmental standards and the potential onshoring of certain production lines; the differences between sectors could be significant, leading to variations in relative prices rather than a general upward path.

As you can see he moves from not being able to measure it to being very unsure although he later points out it is expected to be 1% next year which in his mind justifies his actions. There is the usual psychobabble about price stability being an inflation rate of 2% per annum which if course it isn’t.  #

Policy

It is probably best if you live in a glass house not to throw stones but nobody seems to have told Francois that.

Our choice at the ECB is more pragmatic: since March, we, like the Fed and the Bank of England, have greatly expanded and strengthened our armoury of instruments and in so doing refuted all those – and remember there were a lot of them only a few months ago – who feared that the central banks were “running out of ammunition”.

I will return to that later but let us move onto what Francois regards as longer-term policies.

First, in September 2019, we amended our use of negative rates with a tiering system to mitigate their adverse impacts on bank intermediation. I see no reason to change these rates now.

Actually it has not taken long for Francois to contradict himself on the ammunition point as “see no reason” means he feels he cannot go further into negative interest-rates for the general population. You may also note that he starts with “My Precious! My Precious!” which is revealing. Oh and he has cut the TLTRO interest-rate for banks to -1% more recently.

Plus.

Meanwhile, asset purchases, in operation since mid-2014, reached a total of EUR 2,800 billion in April 2020 and will continue at a monthly average pace of more than EUR 30 billion.

Make of this what you will.

We can also add forward guidance to this arsenal,….. This forward guidance provides considerable leeway to adapt to economic changes thanks to its self-stabilising endogenous component.

New Policy

Suddenly he did cut interest-rates and we are back to “My Precious! My Precious!”

The supply of liquidity to banks has been reinforced in terms of quantity and, above all, through an incentivising price structure. Interest rates on TLTROIII operations were cut dramatically on 12 March and again on 30 April and are now, at -1%

There is also this.

Above all, we have created the EUR 750 billion Pandemic Emergency Purchase Programme (PEPP)…….First, flexibility in terms of time. We are not bound by a monthly allocation…….Second, flexibility in terms of volume. Unlike the PSPP, we are not committed to a fixed amount – today, the PEPP can go “up to EUR 750 million”, and we stated on 30 April that we were prepared to go further if need be.

If we look at the weekly updates which have settled at around 30 billion Euros per week the original 750 billion will run out as September moves into October if that pace is maintained. So it looks likely that there will be more although as the summer progresses things will of course change quite a bit.

Then Francois displays even more of what we might call intellectual flexibility. You see he is not targeting spreads or “yield curve control” or a “spread control” but he is….

While there is a risk that the effects of the crisis may in some cases be asymmetric, we will not allow adverse market dynamics to lead to unwarranted interest rate hikes in some countries.

So he is trying to have his cake and eat it here.

Innovation

This word is a bit of a poisoned chalice as those have followed the Irish banking crisis will know. But let me switch to this subject and open with a big deal for the ECB especially since the sleeping giant known as the German Constitutional Court has shown signs of opening one eye, maybe.

And this brings me to my third point, flexibility in terms of allocation between countries.

He means Italy of course.

Next up is one of the sillier ideas around.

Allow me to say a final word on another development under discussion: the possibility of “going direct” to finance businesses without going through the bank channel. The truth is that we do this already, and have done since 2016, by being among the first central banks to buy corporate bonds.

He is probably keen because of this.

The NEU-CP market in Paris is by far the most active in the euro area, with outstandings of EUR 72 billion in mid-May, and the Banque de France’s most recent involvement since the end of March has been very effective and widely acknowledged by industry professionals.

Ah even better he has been able to give himself a slap on the back as well.

He is eyeing even more.

With its new Main Street Lending Program, the Fed recently went a step further by giving itself the possibility to fund the purchases of bank loans to businesses, via a special-purpose vehicle created with a US Treasury Department guarantee

If banks are bad, why are we subsidising them so much? Also why would central banks full of banks be any better?

After sillier let us have silliest.

ECB’s Villeroy: Would Not Put At Forefront Likelihood Of Buying Up Equities ( @LiveSquawk )

Comment

There is a familiar feel to this as we observe central bankers twisting and turning to justify where they find themselves. Let me start with something which in their own terms has been a basic failure.

This sluggishness in prices comes after a decade of persistently below-target inflation, which has averaged 1.3%.

This provides a range of contexts as of course the inflation picture would look very different if they made any real effort to measure  the one third or so of expenditure that goes on housing costs. In other areas this would be a scandal as imagine how ignoring a third of Covid-19 cases would be received? Also you might think that such failure after negative interest-rates and 2.8 billion Euros of QE might lead to a deeper rethink. This policy effort has in fact ended up really being about what was denied in this speech which is reducing bond yields so governments can borrow more cheaply. The hints in it have helped the ten-year yield in Italy fall to 1.55% as I type this.

Oh the subject of the ECB buying equities I am reminded that I suggested on the 2nd of March it would be next to make that leap of faith. I still think it is in the running however the German Constitutional Court may have slowed it up. The hint has helped the Euro Stoxx 50 go above 3000 today as equity markets continue to be pumped up on liquidity and promises. But more deeply we see that if we look at Japan what has been achieved by the equity buying? The rich have got richer but the economy has not seen any boost and in fact pre this crisis was in fact doing worse. So he is singing along with Bonnie Tyler.

I was lost in France
In the fields the birds were singing
I was lost in France
And the day was just beginning
As I stood there in the morning rain
I had a feeling I can’t explain
I was lost in France in love

 

The central banking parade continues

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

The land of the rising sun

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

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

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

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

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

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

Then looking at his speech another warning Klaxon was triggered.

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

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

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

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

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

The Bank of England

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

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

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

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

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

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

The United States

Something rather ominous happened last night as The Hill reports.

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

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

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

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

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

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

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

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

Comment

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

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

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

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

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

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

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

The Tokyo Whale is hungry again!

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

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

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

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

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

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

The Tokyo Whale

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

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

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

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

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

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

The Precious! The Precious!

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

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

For whom?

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

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

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

Corporate Bonds and Commercial Paper

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

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

Should there be a default there might be trouble.

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

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

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

Japanese Government Bonds

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

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

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

Comment

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

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

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

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

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

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

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

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

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

In the future will the Bank of Japan own everything?

The Express

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

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

Podcast on central bank equity purchases

 

The US Federal Reserve moves nearer to bùying equities

Yesterday as the media clustered around the news from the Bank of England the real news came from the US Federal Reserve which in many respects is acting as the world’s central bank. So it has two roles right now the first is for the world’s largest economy and the second is for the rest of us.For the avoidance of doubt that is the order in which it will operate if its past track record is any guide. There was something of an irony as so many US financial commentators were looking at the Bank of England. Some of you may have spotted me pointing out to the Nobel Prize winner Paul Krugman that he was spreading an economics version of fake news.

The Trigger

This was provided by the latest weekly update on the US labour market

The latest round of coronavirus-induced layoffs and furloughs soared by another 6.6 million in the first week of April, bringing total job losses in less than a month to 16.8 million.Initial jobless claims, a rough proxy for job losses, have now posted increases of 6.6 million, 6.8 million and 3.3 million in the last three weekly readings since the middle of March.

To put these mind-boggling numbers in perspective, before the March 21 surge, the highest single weekly reading ever recorded was 695,000 in 1982,” said chief economist Joshua Shapiro of MFR Inc. ( Marketwatch )

As you can see these were really bad and came with a sub-plot that there had been so many claims that the offices processing this had been struggling to keep up. Thus the real situation was likely to be even worse.

The Federal Reserve’s Response

The US central bank came out of the blocks like a 60 metres sprinter

The Federal Reserve on Thursday took additional actions to provide up to $2.3 trillion in loans to support the economy. This funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus.”

Apart from the rapid response there was an immediate impact from the sum quoted as this was slightly over half the size of the pre Corona Virus peak of the Fed’s balance sheet. So in modern parlance a bazooka.

There was something rather familiar in there which was a central bank “interpreting” its mandate. Let me cover that by looking at the market response via the Financial Times.

The high-yield market, often referred to as “junk”, encompasses the debt issued by lower-rated, riskier companies that are more exposed to deteriorating economic conditions stemming from the viral outbreak and the collapse in oil prices.

In response to the Fed’s move on Thursday, the biggest high-yield bond ETF — run by Blackrock which is also administering the Fed’s bond purchases — jumped by more than 7 per cent, on course for its largest one-day move since 2008.

Therè are two points to consider here which is the expansion of the role of the Fed and the way that Blackrock seems to have surpassed the Vampire Squid Goldman Sachs. As it administers a process which sees its own fund surge! Here is the view from CNBC.

As part of its announcement, the Fed expanded its corporate lending programs to take it into an entirely new area, including ETFs of companies that are rated below investment grade. It had previously announced a program to buy investment-grade corporate debt and ETFs. It also will now accept triple-A-rated commercial mortgage-backed securities and collateralized loan obligations as part of its Term Asset-Backed Securities Lending Facility, first created in the financial crisis.

The Details

Below is the report from the Fed itself and the significant factor is how often these policies need to be underwritten by the US taxpayer.

Bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;

 

Ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility;

 

Increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and

 

Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.

Comment

Back in the day my boss was convinced that the US authorities were buying equities when the market fell and such thoughts became what half – jokingly became called The Plunge Protection Team. That then developed into the concept of central banks providing a Put Option for equity markets via not letting them fall.The most explicit version of that is the Bank of Japan which bought over 500 billion Yen of equities this month . Hence its nickname of The Tokyo Whale.

Now we see the US Fed heading on that road and there is one bit it is copying from Japan which is the use of Exchange Traded Funds or ETFs. I guess that is to avoid having to go to any AGMs and the like. But as to the Fed buying equities well I hope by now I have taught you all what to do with these.

Mnuchin says no talks right now about potential to have fed buy stocks

In terms of monetary policy the balance sheet is already over US $6 trillion and will go much higher. In terms of the money supply the recent growth rate of narrow money was already 13.4% at the end of March and now seems set to surge.

Happy Easter and I hope you have the same weather as London today.

Central Banks will demand even more powers in response to this crisis

Yesterday was quite something with the extraordinary oil price decline topped off by a more than 2000 point fall in the Dow Jones Industrial Average in the United States. I know that it is an outdated and flawed index but nonetheless it felt symbolic. So far today things are quieter with some bounce back in equity markets and the reverse in bond markets. But we have some familiar themes at play so let us get straight to them.

Japan

The Bank of Japan has been at the outer limit of monetary policy for some time now as The Mainichi pointed out earlier today.

The BOJ already owns around 50 percent of outstanding Japanese government bonds of about 1,000 trillion yen ($9.73 trillion), while pledging to buy 80 trillion yen of them per year. It has also bought nearly exchange traded funds.

Further cuts in the negative interest rate of minus 0.1 percent, which have pushed down longer-term interest rates for years, are expected to snap the profitability of the banking sector and hurt returns for insurers and pensions of private companies.

They have got a little excited on the issue of equity purchases as I am not sure what a nearly exchange traded fund is? Let me help out by pointing out that the Bank of Japan purchased some 101.4 billion Yen of equity ETFs both yesterday and today. Today’s purchases have a different perspective because the market closed higher, this is because the Bank of Japan has established a principle of only buying on down days. In this present crisis it has abandoned that twice so far. In addition its “clip size” has risen from 70.4 billion Yen to 101.4 billion. So far in March it has bought around 410 billion Ten of equities.

So Andrea True Connection continues to be playing from its loudspeakers.

More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it
More, more, more
How do you like it, how do you like it

It also buys commercial property ETFs although it is much less enthusiatic about this and has only bought 3.6 billlion Yen of them this month. Frankly I am not sure what these particular purchases are to achieve but they continue.

Fiscal Policy

I regularly point out that fiscal policy has been oiled and facilitated by the low level of bond yields. As The Mainichi points out above The Tokyo Whale has purchased half the Japanese bond market meaning that at many maturities Japan is being paid to borrow and even the thirty-year yield is a mere 0.3%. Thus it helps this.

President Donald Trump on Monday said he will be taking “major” steps to gird the U.S. economy against the impact of the spreading coronavirus outbreak, while Japan’s government plans to spend more than $4 billion in a second package of steps to cope with fallout from the virus. ( Reuters)

If we stay with Japan for now I note that as I looked this up there were references to a US $122 billion stimulus as recently as December. This is a problem as Japan keeps needing more fiscal stimuli and it is a particular issue right now. This is because last year’s rise in the Consumption Tax was supposed to improve the fiscal position whereas all we have seen since is stimuli or moves in the opposite direction.

This is a recurring theme in Japan as we mull the consequences of such extreme monetary action. Let me give you another example of a backwash for the control agenda. The policy of Yield Curve Control because it aims at a specific yield target for Japanese Government Bonds has been keeping yields up and not down in recent times.

The Euro area

It was only last week that I suggested the ECB could become the next major central bank to buy equities and thus I noted this overnight from a former Vice-President.

Should the central banks’ mandate be extended to explicitly include financial stability, giving them more instruments to try to contain asset prices booms instead of just “mopping-up after the crash”. Policy reviews are ongoing and everything must be on the table this time.

That is Vitor Constancio saying “everything must be on the table this time”.

I doubt he meant this but something has turned up today that will require ECB support.

ROME (Reuters) – Payments on mortgages will be suspended across the whole of Italy after the coronavirus outbreak, Italy’s deputy economy minister said on Tuesday.

“Yes, that will be the case, for individuals and households,” Laura Castelli said in an interview with Radio Anch’io, when asked about the possibility.

Italy’s banking lobby ABI said on Monday lenders representing 90% of total banking assets would offer debt moratoriums to small firms and households grappling with the economic fallout from Italy’s coronavirus outbreak.

Yesterday we noted that businesses were going to get a debt payment moratorium and today we see mortgages will also be on the list. This will immediately lead to trouble for the banks and of course the Italian banks were in enough trouble as it is. Even the bank considered the strongest Unicredit has a share price 23% lower than a year ago and of course there are all the zombies.

This also impacts at a time when Italian bond yields have risen albeit to a mere 1.3% for the ten-year benchmark. But even that leads to worries as Reuters point out.

Despite the introduction of tougher banking regulation and oversight in the wake of the euro zone debt crisis a decade ago, the doom loop remains.

Italian banks held 388.22 billion euros of Italian government bonds in their portfolios at the end of January, around a sixth of the country’s public debt.

“The feedback loop between the sovereign and banks in Italy is alive and well, and both sovereign and bank debt should trade in lock-step,” said Antoine Bouvet, senior rates strategist at ING.

Mentions of something that was in danger of being forgotten are on the rise so let me point out this from the ECB website.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

There are other issues here as plainly Italy is about to blast through the Stability and Growth Pact or Maastricht fiscal rules. Also I note that the European Stability Mechanism would be involved as why put things on balance sheet when you can tuck them away in a Special Purpose Vehicle or SPV? But the ECB will be busy and let me throw a snack into the debate, might it support bank shares?

Comment

There is quite a bit to consider here and the news keeps coming on this front.

#JAPAN SEEN MULLING EXPANSION OF ETF BUYING PROGRAM, KYODO SAYS – BBG ( @C.Barraud )

On and on it goes with so few ever questioning why it is always more needed? At some point you need an audit of progress so far and successes and failures. Whereas obvious failures get swept under the carpet. Let me give you an example of this from a Sweden which had negative interest-rates for several years but has now climbed back to the giddy heights of 0%. Yet Sweden Statistics reports this.

In recent years, households have made large net deposits in bank accounts despite low interest rates.

Then there is this as well.

Households’ net purchases of new tenant-own apartments amounted to SEK 21 billion in the fourth quarter of 2019, which is the highest value ever in a single quarter.

This returns us to the side-effects of such policies which is where we came in looking at Japan which has loads of them.

But ever quick to use a crisis to expand their powers the central bankers will be greedily using this crisis to do so. So we can expect more mortgage moratorium’s which of course will require even more help for “The Precious”.

Just as I was posting this it seems to be happening already.

BREAKING: RBS confirms it will give a three-month mortgage payment holiday to homeowners impacted by coronavirus. Follows Italy saying mortgage payments will be suspended. ( @gordonrayner )

I wonder if the Bank of England has been moving behind the scenes? Meanwhile it too moved on yesterday as one of the bonds it purchased in its Operation Twist QE purchases was at a negative yield.

The ECB could be the next central bank to start buying equities

It feels like quite a week already and yet it is only Monday morning! As rumours circulated and fears grew after some pretty shocking data out of China on Sunday the Bank of Japan was limbering up for some open mouth action. Below is the statement from Governor Kuroda.

Global financial and capital markets have been unstable recently with growing uncertainties about the outlook for economic activity due to the spread of the novel coronavirus.
The Bank of Japan will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.

Actually most people were becoming much clearer about the economic impact of the Corona Virus which I will come to in a moment. You see in the language of central bankers “uncertainties” means exactly the reverse of the common usage and means they now fear a sharp downturn too. This will be a particular issue for Japan which saw its economy shrink by 1.6% in the final quarter of last year.

But there was a chaser to this cocktail which is the clear hint of what in foreign exchange markets the Bank of Japan calls “bold action” or intervention. This not only added to this from Chair Powell of the US Federal Reserve on Friday but came with more.

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.

As an aside if the fundamentals of the US economy were strong the statement would not be required would it?

The Kuroda Put Option

The problem for the Bank of Japan is that it was providing so much liquidity anyway as Reuters summarises.

Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and pledges to cap long-term borrowing costs around zero. It also buys government bonds and risky assets, such as ETFs, as part of its massive stimulus program.

The Reuters journalist is a bit shy at the end because the Bank of Japan has been buying equity ETFs for some time as well as smaller commercial property purchases. I have been watching and all last week apart from the public holiday on Monday they bought 70.4 billion Yen each day.

Regular readers will be aware that the Bank of Japan buys on down days in the equity market and that the clip size is as above. Or if you prefer Japan actually has an explicit Plunge Protection Team or PPT and it was active last week. This morning though Governor Kuroda went beyond open mouth operations.

BoJ Bought Japan Stock ETFs On Monday – RTRS Market Sources BoJ Normally Does Not Buy ETFs On Day TOPIX Index Is Up In Morning ( @LiveSquawk )

As you can see they have changed tactics from buying on falls to singing along with Endor.

Don’t you know pump it up
You’ve got to pump it up
Don’t you know pump it up
You’ve got to pump it up

Also there was this.

BANK OF JAPAN BOUGHT RECORD TOTAL 101.4B YEN OF ETFS TODAY ( @russian_market )

Actually about a billion was commercial property but the principle is that the Bank of Japan has increased its operations considerably as well as buying on an up day. So the Nikkei 225 index ended up 201 points at 21,344 as The Tokyo Whale felt hungry.

Coordinated action

The Bank of England has also been indulging in some open mouth operations today.

“The Bank continues to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.

The Bank is working closely with HM Treasury and the FCA – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability.” ( The Guardian)

The rumours are that interest-rate cuts will vary from 1% from the Federal Reserve to 0.5% at places like the Bank of England to 0.1% at the ECB and Swiss National Bank. The latter are more constrained because they already have negative interest-rates and frankly cutting by 0.1% just seems silly ( which I guess means that they might….)

There have already been market responses to this. For example the US ten-year Treasury Bond yield has fallen below 1.1%. The ten-year at 0.75% is a full percent below the upper end of the official US interest-rate. So the hints of interest-rate cuts are in full flow as we see Treasuries go to places we were assured by some they could not go. Oh and you can have some full number-crunching as you get your head around reports that expectations of an interest-rate cut in Australia are now over 100%

The Real Economy

China

If we switch now to hat got this central banking party started it was this. From the South China Morning Post on Saturday.

Chinese manufacturing activity plunged to an all-time low in February, with the first official data published amid the coronavirus outbreak confirming fears over the impact on the Chinese economy.

The official manufacturing purchasing managers’ index (PMI) slowed to 35.7, the National Bureau of Statistics (NBS) said on Saturday, having slipped to 50.0 in January when the full impact of the corona virus was not yet evident.

The only brief flicker of humour came from this.

Analysts polled by Bloomberg had expected the February reading to come in at 45.0.

Although you might think that manufacturing would be affected the most there was worse to come.

China’s non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – also dropped, to 29.6 from 54.1 in January. This was also the lowest on record, below the previous low of 49.7 in November 2011, according to the NBS. Analysts polled by Bloomberg had expected the February reading to come in at 50.5.

To give you an idea of scale Greece saw its PMI ( it only has a manufacturing one) fell into the mid-30s as its economic depression began. So we are now facing not only a decline in economic growth in China but actual falls. This is reinforced by stories that factories are being asked to keep machines running even if there are no workers to properly operate them to conceal the size of the slow down.

Comment

The problem for central banks is that they are already so heavily deployed on what is called extraordinary monetary policy measures. Thus their ammunition locker is depleted and in truth what they have does not work well with a supply shock anyway as I explain in the podcast below. So we can expect them to act anyway but look for new tools and the next one is already being deployed by two central banks. I have covered the Bank of Japan so step forwards the Swiss National Bank.

Total sight deposits at the SNB rose by CHF3.51bn last week… ( @nghrbi)

Adding that to last weeks foreign exchange intervention suggests it has another 1 billion Swiss Francs to invest in (mostly US) equities.

Who might be next? Well the Euro is being strong in this phase partly I think because of the fact it has less scope for interest-rate cuts and partly because of its trade surplus. Could it copy the Swiss and intervene to weaken the Euro and investing some of the Euros into equities? It would be a “soft” way of joining the party. Once the principle is established then it can expand its activities following the model it has established with other policies.

As for other central banks they will be waiting for interest-rates to hit 0% I think. After all then the money created to buy the shares will be “free money” and what can go wrong?

Podcast

 

The Bank of Japan is exploring the outer limits of monetary policy

Today I wish to invert my usual rule and open with a look at financial markets because in this instance they help to give us an insight into the real economy.

The Nikkei 225 average tumbled 650.23 points, or 3.01 percent, to end at 20,977.11, its first closing below 21,000 since Feb. 15. On Friday, the key market gauge rose 18.42 points.

The Topix, which covers all first-section issues on the Tokyo Stock Exchange, finished 39.70 points, or 2.45 percent, lower at 1,577.41 after gaining 2.72 points Friday. ( The Japan Times)

We have a crossover here as Japan catches up with what western markets did on Friday. But if we return to Friday’s subject of expected central bank activity, well in Japan it is already happening. In other markets discussions of the existence of a Plunge Protection Team for stock markets are more implicit than explicit but Japan actually has one. The Bank of Japan or as it has become known the Tokyo Whales does so and according to its accounts bought some 70,200,000.000 Yen’s worth this morning in its attempt to resist the fall. That amount has become a habit in more ways than one as on days of solid falls that is the amount it buys as for example it bought the same amount on the 13th, 8th and 7th of this month. It’s total holdings are now at least 24,595,566,159,000 Yen and I write at least because whilst it declares most of them explicitly in its accounts some other holdings are tucked away elsewhere.

Monetary Policy

To finance these purchases the Bank of Japan creates money and expands the monetary base. It adds to its other attempts to do so as for example it also buys commercial property ( in a similar route to the equity market it buys exchange-traded funds or ETFs) as well as commercial paper and corporate bonds. But the main effort is here.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward
and downward to some extent mainly depending on developments in economic activity and prices.
7 With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual
pace of about 80 trillion yen.

As you can see it is buying pretty much everything with the only variable left being how much. If we stay with that theme we have seen regular media reports that it is tapering it s buying of which the latest was Bloomberg on the 14th, Those reports have varied from being outright wrong ( about equity purchases) to nuanced as for example circumstances can limit the size of JGB buys.

Meanwhile, the government would continue to undertake expenditure reforms and reduce the
amount of newly issued government bonds for fiscal 2019 by about 1 trillion yen compared to that for fiscal 2018. ( Bank of Japan)

But also market developments play a role as I note this from @DavidInglesTV this morning.

Japan 10Y yields collapse further into negative territory

There is a bit of hype in the use of the word collapse to represent the benchmark yield falling to -0.06% but there are relevant factors in play. For example yet another benchmark bond yield is moving further into negative yield territory as Japan accompanies Germany. Next we have an issue for Bank of Japan policy as it is left sitting on its hands if Mr(s) Market takes JGBs to where its “guidance” is anyway meaning it does not have to buy more. So its bond buyers are left singing along with the Young Disciples.

Apparently nothing
Nothing apparently
Apparently nothing
Nothing apparently

The Yen

This is another area where the Bank of Japan is active. These days it is not that often in the news promising “bold action” and much less actually explicitly intervening. But according to economics 101 all the money printing ( more technically expansion of the monetary base) should lead to a lower Yen. For a while it did but these days the position is more nuanced as The Japan Times reminds us.

The stronger yen battered export-oriented issues. Industrial equipment manufacturers Fanuc sagged 3.84 percent and Yaskawa Electric 5.35 percent, and electronic parts supplier Murata Manufacturing lost 3.14 percent.

In a way here the Tokyo Whale is spoilt for choice as it could act to weaken the Yen and/or buy ETFs with those equities in them. But the reality is that lower equity markets create a double-whammy for it as hoped for wealth effects fade and a flight to perceived safety strengthens the Yen. Thus we find the Yen at around 110 to the US Dollar as I type this.

One of the central tenets of Abenomics was supposed to be the delivery of a 2% annual inflation target which would “rescue” Japan from deflation. Yet mostly through the way the Yen has resisted the downwards pressure leaves us observing this.

As for prices, members concurred that the year-on-year rate of change in the CPI for all items less fresh food was in the range of 0.5-1.0 percent, and the rate of increase in
the CPI for all items less fresh food and energy remained in the range of 0.0-0.5 percent, due partly to firms’ cautious wage- and price-setting stance.

The all items inflation rate was 0.2% in February. The situation is a clear failure leading one Board Member to spread the blame.

households’ tolerance of price rises had not shown clear improvement and services prices in such sectors as dining-out had not risen as much as expected.

Comment

We can now bring in a strand from recent articles which has been illustrated earlier by the former chair of the US Federal Reserve Janet Yellen.

*YELLEN: GLOBAL CENTRAL BANKS DON’T HAVE ADEQUATE CRISIS TOOLS ( @lemasabachthani )

Also something which we figured out some months back.

*YELLEN: FED TO OPERATE WITH LARGE BALANCE SHEET FOR LONG TIME

Also let me throw in something which shows an even deeper lack of understanding.

Former U.S. Federal Reserve Chair Janet Yellen said Monday that the U.S. Treasury yield curve[s:TMUBMUSD10Y], which inverted on Friday for the first time since 2007, may signal the need to cut interest rates at some point, but it does not signal a recession. ( @bankinformer )

Firstly central bankers have pretty much a 100% failure rate when it comes to forecasting recessions. Next we have an issue where they help create an inverted yield curve then worry about it! That may turn out to be something with very different effects to one achieved more naturally.

But the real issue here is that Janet like her ilk is guiding us towards more monetary easing but we have been observing for some years that in terms of the Shangri-Las the Bank of Japan is the Leader of the Pack. But once we switch to how is that going we hit trouble. From Friday.

The flash Nikkei Manufacturing PMI for March remained unchanged at 48.9 in March, registering below the 50.0 no change level for a second successive month to indicate an ongoing downturn in the goods-producing sector. The latest readings are the lowest recorded since June 2016.

Among the various survey sub-indices, the output index signalled a third consecutive monthly fall in manufacturing production, with the rate of decline accelerating to the fastest since May 2016. The drop in production was the third largest seen since 2012.

Now today.

Japan’s new vehicle sales in fiscal 2019 are projected to fall 2.0 percent from the current fiscal year to 5.22 million units amid growing economic uncertainty, an industry body said Monday. ( The Mainichi )

That adds to the slow down in the real growth rate such that GDP rose in the final quarter of 2018 by a mere 0.3% on a year before. Not exactly an advert for all the monetary easing is it?

Weekly Podcast