Are negative interest-rates becoming a never ending saga?

Today brings this subject to mind and let me open with the state of play in Switzerland.

The Swiss National Bank is maintaining its expansionary
monetary policy, thereby stabilising price developments
and supporting economic activity. Interest on sight
deposits at the SNB remains at – 0.75% and the target
range for the three-month Libor is unchanged at between
– 1.25% and – 0.25%.

As you can see negative interest-rates are as Simple Minds would put it alive and kicking in Switzerland. They were introduced as part of the response to a surging Swiss Franc but as we observe so often what are introduced as emergency measures do not go away and then become something of a new normal. It was back on the 18th of December 2014 that a new negative interest-rate era began in Switzerland.

The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.

Actually the -0.25% official rate lasted less than a month as on the 15th of January 2015 the minimum exchange rate of CHF 1.20 per euro was abandoned and the official interest-rate was cut to -0.75% where it remains.

Added to that many longer-term interest-rates in Switzerland are negative too. For example the Swiss National Bank calculates a generic bond yield which as of yesterday was -0.26%. This particular phase of Switzerland as a nation being paid to borrow began in late November last year.

The recovery

The latest monthly bulletin tells us this.

Jobless figures fell further, and in February the
unemployment rate stood at 2.4%.

There was a time when this was considered to be below even “full employment” a perspective which has been added to this morning and the tweet below is I think very revealing.

If we look at the Swiss economy through that microscope we see that in this phase the unemployment rate has fallen by 1%. Furthermore we see that not only is it the lowest rate of the credit crunch era but also for much of the preceding period as it was back around the middle of 2002.

So if we look at the Swiss internal economy it is increasingly hard to see what would lead to interest-rates rising let alone going positive again. This is added to by the present position as described by the SNB monthly bulletin.

According to an initial estimate, GDP in Switzerland grew
by 0.7% in the fourth quarter. Overall, GDP thus stagnated
in the second half of 2018, having grown strongly to
mid-year.
Leading indicators and surveys for Switzerland point to
moderately positive momentum at the beginning of 2019.

The general forecasting view seems to be for around 1.1% GDP growth this year. So having not raised interest-rates in a labour market boom it seems unlikely unless they have a moment like the Swedish Riksbank had last December that we will see one this year,

Exchange Rate

There is little sign of relief here either. There was a brief moment round about a year ago that the Swiss Franc looked like it would get back to its past 1.20 floor versus the Euro. But since then it has strengthened and is now at 1.126 versus the Euro. Frankly if you are looking for a perceived safe-haven then does a charge of 0.75% a year deter you? That seems a weak threshold and reminds me of my article on interest-rates and exchange rates from the 3rd of May last year.

However some of the moves can make things worse as for example knee-jerk interest-rate rises. Imagine you had a variable-rate mortgage in Buenos Aires! You crunch your domestic economy when the target is the overseas one.

Well events have proven me right about Argentina but whilst the scale here is much lower we have a familiar drum beat. The domestic economy has been affected but the exchange-rate policy has had over four years and is ongoing.

The Euro

Let me hand you over to the President of the ECB Mario Draghi at the last formal press conference.

First, we decided to keep the key ECB interest rates unchanged. We now expect them to remain at their present levels at least through the end of 2019……….These are decisions that have been taken following a significant downward revision of the forecasts by our staff.

For reasons only known to themselves part of the financial media persisted in suggesting that an ECB interest-rate rise was in the offing and it would be due round about now. The reality is that any prospect has been pushed further away if we note the present malaise and read this from the same presser.

negative rates have been quite successful in our monetary policy.

Although we can never rule out an attempt to continue to impose negative rates on us but exclude the precious in some form.

Sweden

Last December the Riksbank did start to move away from negative interest-rates. The problem is that they now find themselves wearing something of a central banking dunces cap. Having failed to raise rates in a boom they decided to do so in advance of events like this.

Total orders in industry decreased by 2.0 percent in February 2019 compared with January, in seasonally adjusted figures………..Among the industrial subsectors, the largest decrease was in the industry for motor vehicles, down 12.7 percent compared with January. ( Sweden Statistics yesterday)

Like elsewhere the diesel debacle is taking its toll.

The new registrations of passenger cars during 2019 decreased by 15.2 percent compared with last year. There were 27 710 diesel cars in total registered this year, a decrease of 26 percent compared with last year.

Anyway this is the official view.

As in December, the forecast for the repo rate indicates that the next increase will be during the second half of 2019, provided that the economic outlook and inflation prospects are as expected.

Japan

This is the country that has dipped its toe into the icy cold world of negative rates by the least but the -0.1% has been going for a while now.

introduced “QQE with a Negative Interest Rate” in January 2016 ( Bank of Japan)

If the speech from Bank of Japan Board Member Harida on March 6th is any guide it is going to remain with us.

I mentioned earlier that the economy currently may be weak, and the same can be said about prices.

Also he gives an alternative view on the situation.

Following the introduction of QQE, the nominal GDP growth rate, which had been negative since the global financial crisis, has turned positive………Barring the implementation of both QE and QQE, Japan’s nominal GDP growth would have remained in negative territory this whole time since 1998.

Is it all about the nominal debt of the Japanese state then? Also he seems unlikely to want an interest-rate increase.

Rather, premature policy tightening in the past caused economic deterioration, a decline in both prices and production, and lowered interest rates in the long run.

Comment

We find that there are two routes to negative interest-rates. The first is to weaken the exchange-rate such as we have seen in Switzerland and the second is to boost the economy like in the Euro area. So external in the former and internal in the latter. It can be combined as if you wish to boost your economy a lower exchange-rate is usually welcome and this pretty much defines Abenomics in Japan.

As we stand neither route seems to have worked much. Maybe a negative interest-rate helped the Euro area and Japan for a while but the current slow down suggests not for that long. So we face something of an economic oxymoron which is that it is the very fact that negative interest-rates have not worked which explains their longevity and while they seem set to be with us for a while yet.

 

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How is it that even Germany needs an economic stimulus?

Sometimes we have an opportunity like the image of Janus with two heads to look at an event from two different perspectives. This morning’s trade data for Germany is an example of that. If we look at the overall theme of the Euro era then the way that Germany engineered a competitive devaluation by joining with weaker economies in a single currency has been a major factor in this.

According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of 16.3 billion euros in February 2019, which takes into account the balances of trade in goods including supplementary trade items (+19.1 billion euros), services (-1.1 billion euros), primary income (+6.2 billion euros) and secondary income (-7.9 billion euros). In February 2018, the German current account showed a surplus of 19.5 billion euros.

The large surplus which as you can see derives from its trade in goods feels like a permanent feature of economic life as it has been with us for so long. Also it is the bulk of the trade surplus of the Euro area which supports the value of the Euro although if we shift wider the Germany trade surplus is one of the imbalances which led to the credit crunch itself. So let us move on as we note an example of a currency devaluation/depreciation that has been quite a success for Germany.

What about now?

The theme of the last six months or so has shone a different perspective on this as the trade wars and economic slow down of late 2018 and so far this year has led to this.

Germany exported goods to the value of 108.8 billion euros and imported goods to the value of 90.9 billion euros in February 2019……After calendar and seasonal adjustment, exports were down 1.3% and imports 1.6% compared with January 2019.

We can add to that by looking at January and February together and if we do so on a quarterly basis then trade has reduced the German economy by a bit over a billion Euros. Compared to last year the net effect is a bit under four billion Euros.

One factor in this that is not getting much of an airing is the impact of the economic crisis in Turkey. If look at in from a Turkish perspective some 9% of imports come from Germany ( h/t Robin Brooks) and the slump will be impacting even though if we switch to a German view the relative influence is a lot lower.

Production

On Friday we were told this.

+0.7% on the previous month (price, seasonally and calendar adjusted)
-0.4% on the same month a year earlier (price and calendar adjusted)

There was an upwards revision to January and if we look back we see that the overall number peaked at 108.3 last May fell to 103.7 in November and was 105.2 in February if we use 2015 as our benchmark. So there has been a decline and we will find out more next month as March was a fair bit stronger than February last year.

Orders

These give us a potential guide to what is on its way and it does not look good.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in February 2019 a seasonally and calendar adjusted 4.2% on the previous month……..-8.4% on the same month a year earlier (price and calendar adjusted).

If we switch to the index we see that at 110.2 last February was the peak so that is a partial explanation of why the annual fall is so large as for example March was 108.6. But it is also true that this February saw a large dip to the weakest in the series so far at 101. 2 which does not bide well.

Also you will no doubt not be surprised to read that a decline in foreign orders has led to this but you may that it is orders from within the Euro area that have fallen the most. The index here was 121.6 last February as opposed to 104.6 this.

Forecasts

On Thursday CNBC told us this.

Forecasts for German growth were revised significantly downwards in a ‘Joint Economic Forecast’ collated by several prominent German economic research institutes and published Thursday, with economists predicting a meager 0.8% this year.

This is more than one percentage point lower than a prediction for 1.9% made in a joint economic forecast in fall 2018.

Although they should be eating a slice of humble pie after that effort last autumn.

The private sector surveys conducted by Markit were a story of two halves.

Despite sustained strong growth in services business activity in March, the Composite Output Index slipped from a four-month high of 52.8 in February to 51.4, its lowest reading since June 2013. This reflected a marked fall in goods production – the steepest since July 2012.

In terms of absolute levels care is needed as this survey showed growth when the German economy contracted in the third quarter of last year. The change in March was driven by something that was eye-catching.

Manufacturing output fell markedly and at the fastest
rate since 2012, with the consumer goods sector joining
intermediate and capital goods producers in contraction.

Comment

A truism of the Euro era is that the ECB sets monetary policy for Germany rather than for the whole area. Whilst that has elements of truth to it the current debate at the ECB suggests that it is “The Precious” which takes centre stage.

A debate on whether to “tier” the negative interest rates that banks pay on the idle cash they park at the ECB is now underway, judging by recent ECB comments and the minutes from the March meeting. ( Reuters)

There is a German element here as we note a Deutsche Bank share price of 7.44 Euros which makes any potential capital raising look very expensive especially to existing shareholders.. Also those who bought the shares after the new hints of a merger with Commerzbank have joined existing shareholders in having singed fingers. Maybe this is why this has been floated earlier.

The next frontier for stimulus at the ECB should include stock purchases, BlackRock’s Rick Rieder says

Will he provide a list? I hope somebody at least pointed out that the Japanese experience of doing this has hardly been a triumph.

It all seems not a little desperate as we see that ECB policy remains very expansionary at least in terms of its Ivory Tower models. It’s ability to assist the German economy has the problem that it already holds some 511 billion of German bonds at a time when the total numbers are shrinking, so there are not so many to buy.

This from Friday suggests that should the German government so choose there is plenty of fiscal space.

According to provisional results of quarterly cash statistics, the core and extra budgets of the overall public budget – as defined in public finance statistics – recorded a financial surplus of 53.6 billion euros in 2018.

That is confirmed by so many of Germany’s bond having a negative yield illustrated by its benchmark ten-year yield being 0% as I type this.

The catch is provided by my junkie culture economics theme. Why after all the monetary stimulus does even Germany apparently need more? In addition if we have been “saved” by it why is the “speed limit” for economic growth now a mere 1.5%?

They can tell you what to do
But they’ll make a fool of you ( Talking Heads )

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Italy looks set for another economic recession sadly

A feature of the last year or so has been something of an economic car crash unfolding in Italy and we have received two further perspectives on that subject this morning. Sadly neither is an April Fool although in these times they have become ever harder to spot. According to Markit times not only remain hard but have deteriorated in the manufacturing sector.

Manufacturing business conditions in Italy continued
to worsen in March as a sharp reduction in new orders
led to a further decline in output. Production fell for the
eighth consecutive month, whilst new orders contracted
at the fastest rate in nearly six years. Meanwhile, business
confidence dipped slightly from February, but was
nonetheless positive.

The reported fall in new orders was led from abroad.

Additionally, new business from abroad fell in March
at a rate just shy of December 2018’s near six-and-a-half year record.

This meant that the reading was as follows.

At 47.4, the reading was down from 47.7 in February
and signalled the sharpest monthly decline in the health of
the sector since May 2013.

Also the optimism reported frankly seems at odds with reality.

Optimism regarding the year ahead outlook for output was
sustained in March, but concerns over further contractions
in customer demand and a continuation of negative market
trends meant sentiment weakened from February.

Markit itself does not seem to hold out much hope for a quick rebound.

All in all, Italian manufacturing output looks set to decline
further in Q2, especially when looking at slowdowns in key
sources of external demand in neighbouring European
markets.

Employment

The situation here posed a question too this morning.

In February 2019, the number of employed people moderately declined compared with January (-0.1%,
-14 thousand); the employment rate decreased to 58.6% (-0.1 percentage points). The fall of employment
involved mainly people aged 35-49 years (-74 thousand), while people aged over 50 continued to go up
(+51 thousand).

There is an interesting age shift in the pattern which we are seeing across a wide range of countries. There are two main drivers here which are interrelated. The first is the demographic of an ageing population. The second is the rises in official retirement ages and in Italy perhaps the ongoing economic troubles leading to actual retirements being postponed.

If the manufacturing PMI is any guide the employment falls continued in March too.

As a result of the setbacks in output and new work,
employment in Italy’s manufacturing sector declined in
March.

Also as IPE pointed out last September that the retirement situation in Italy is typically complex.

By comparison, the statutory retirement age in 2019 will be 67. This keeps rising, as planned by law, to keep up with demographic projections. In reality, however, people on average retire at about the age of 62. This is the result of the complicated legislative framework, which effectively means every worker’s personal circumstances can contribute to bringing his retirement age forward.

Also the current government has plans to reduce the official retirement age.

Returning to the employment data we see that the situation is turning as previously there had been rises.

Employment rose by 0.5% (+113 thousand) compared with February 2018. The increase concerned men
and women, involving people aged 25-34 years (+21 thousand) and over 50 (+316 thousand).

Unemployment

There was something of a double whammy in the labour market in February.

In February, the number of unemployed persons rose by 1.2% (+34 thousand); the increase involved men
and women and persons aged over 35. The unemployment rate grow up to 10.7% (+0.1 percentage
points), while the youth rate slight decreased to 32.8% (-0.1 percentage points).

So both unemployment and the unemployment rate rose. There is also something of a swerve familiar to regular readers of my work which is that the unemployment rate in January was reported originally at 10.5%. However it is now reported as being up 0.1% at 10.7%. So the impression is given that it is 0.1% up when in fact it was worse in January and is now worse than that or if you like the rise is 0.2% against the original. The fall in youth unemployment is much more welcome but it is hard not to have a concern about the way that it is still 32.8%. In fact there are two concerns to my mind. Firstly that it too may start to rise as prospects weaken and secondly along the signs of the song from Ace.

How long has this been going on?
How long has this been going on?

There must be more than a few in the youth unemployment numbers who have been unemployed for years and must feel like giving up.

Over the past year the decline in unemployment now looks rather marginal.

On a yearly basis, the growth of employment was accompanied by the fall of unemployed persons (-1.4%,
-39 thousand) and inactive people aged 15-64 (-1.3%, -169 thousand).

Actually I can go further as the three-month average looked like it was heading to 10% and did make 10.25% if I stare hard at the chart. But the reality was that the response to the relative boom was already over and the unemployment rate was turning and then rising.

Two lost decades?

A research paper from Italy’s statisticians suggest two linked and thereby troubling trends especially for the south.

 Both qualifications of the latter manual type show, in the twenty years, a considerable increase in the stock of employees that exceeds the growth of the
employed people who carry out work with higher qualifications. Also on the positive side of the variations, there are clear territorial differences that have a
different impact on the employment balance for Italy and for the South, where the contribution to the medium-high and high qualification employment is less than one third of
the contribution given by this work to the employment of the Country.

This is a version of my “Good Italy: Bad Italy” theme where the south in particular has seen quite a deterioration in the quality of employment and in particular skilled manual work has been replaced by non-skilled.

Official economic surveys

As you can see these bring maybe a little hope as they give opposite results.

In March 2019, the consumer confidence index decreased from 112.4 to 111.2. All of its components worsened: the economic, the personal, the current and the future one (from 126.4 to 123.9, from 108.2 to 106.8, from 109.4 to 107.8 and from 116.9 to 115.9, respectively).

With regard to the business surveys, the business confidence index (IESI, Istat Economic Sentiment Indicator) bettered from 98.2 to 99.2.

The business sentiment gain came mostly from the services sector.

Comment

There was a time around six months ago that the Italian government was talking about economic growth of 2% and in some extreme cases 3% where yesterday we were told this. From Reuters.

 Italy can’t afford fiscal expansion at a time when its economic growth is heading to close to zero, Treasury Minister Giovanni Tria said on Sunday.

Tria said Italy was in a phase of economic slowdown and could not consider introducing restrictive measures. He was speaking at a conference in Florence, and his remarks were carried on Italian radio stations.

“Certainly we don’t have the room for expansionary measures,” he then added.

Actually the official data has shown it to have been at zero in the year to the last quarter of 2018 and we now fear that it is contracting.. Any decline this quarter will put Italy into yet another recession and the number-crunching is not favourable.

The carry-over annual GDP rate of change for 2019 is equal to -0.1%.

Meanwhile over to the banks National Resolution Fund and its 2018 accounts.

The main results of the annual accounts for the year ended 31 December 2018 are as follows:

  • Assets € 429,869,033;
  • Liabilities € 972,900,609;
  • Endowment fund (excluding the result for the year) € (484,918,684);
  • Net result for the period € (58,112,892);
  • Endowment fund at 31 December 2018 € (543,031,576).

The negative net result for the period is largely attributable to:

  • Interest expense € (31.4 million);
  • Allocations to the provisions for risks € (26.5 million).

How does a negative endowment fund work?

 

 

 

 

 

 

The War on Cash is exposed by yet more banking sector money laundering

Some days events almost write an update for me and so without further ado let me hand you over to a letter from the President of the ECB Mario Draghi to the Spanish MEP Ms Paloma López Bermejo.

The Governing Council of the ECB has decided to stop issuing the €500 banknote and to exclude it from the
Europa banknote series , amid concerns that this denomination could facilitate illicit activities. As of 27
January 2019, 17 of the 19 national central banks in the euro area no longer issue €500 banknotes.

As you will see in a moment if “could facilitate illicit activities” was applied consistently then Mario would be closing down bank after bank and maybe all of them. Yet we find that when we come to “the precious” that the goalposts are on wheels as they are so mobile. Oh and you may not be surprised to see which two central banks are dragging their feet.

To ensure a smooth transition and for logistical reasons, the Deutsche Bundesbank and the Oesterreichische
Nationalbank requested the right to continue issuing the notes until 26 April 2019.

I am not quite sure where Mario is going with this bit as actual withdrawal of the notes would collapse confidence in his currency.

In order to maintain public trust in euro banknotes, existing €500 banknotes will remain legal tender and can
continue to be used as a means of payment and store of value. They will also retain their value; because it
will remain possible to exchange them at the national central banks of the Eurosystem for an unlimited period
of time.

Swedbank and money laundering

This has been a fast-moving story so let us dip into Reuters from only yesterday,

Money laundering allegations against Swedbank have sparked fears that the largest lender in the Baltic region will become embroiled in a scandal engulfing rival Danske Bank, and face the threat of lawsuits, fines and other sanctions.

Swedbank Chief Executive Birgitte Bonessen said she was doing everything she could to handle the situation, adding that nobody at the bank had been charged with committing a crime.

That has moved on already as we move to @LiveSquawk.

Trading In Shares In Swedbank Halted……….Swedbank Shares Trade Halt To Remain Until Notice From AGM…….Swedbank Says Board Has Dismissed CEO Bonnesen, Started Search For Permanent Replacement

As you can see this escalated quickly and is still doing so as I type this. As to Ms. Bonnesen we see that not only are her fingers all over this but it looks like she was promoted due to her “success” in what has turned out to be money laundering on an industrial scale. Back to Reuters.

“Swedbank believes that it has been truthful and accurate in its communications with all government authorities,” said Bonnesen who oversaw the bank’s anti-money laundering policy between 2009 and 2011 before heading its Baltic operations.

As to the details of what took place there is this.

Regulators in Sweden, Estonia, Latvia and Lithuania began a joint investigation into Swedbank after SVT in February reported allegations that at least 40 billion Swedish crowns ($4.3 billion) in suspicious transactions took place between Swedbank and Danske Bank’s Baltic accounts.

If we look at the share price we can put a time on this as the 210.8 Krona on the 19th of February was replaced by 165.1 on the 21st. It was 148.8 this morning before trading was halted.

Moving to the specific problems we see this. Johannes Borgen pointed out yesterday evening that a familiar theme of “higher and higher baby” was at play.

“Today’s initiated activity [.. refers to unlawful disclosure of inside information and aggravated swindling.” On top of the reported 135bn cash flows for high risk non resident clients in the Baltics.

Also one of the flags for this sort of thing are PEPs or Politically Exposed Persons where banks have or rather should have very strict rules for obvious reasons and yet there was this. Johannes again in the next two quotes.

SVT reported that ex-Ukraine boss Yanukovych used a Swed Baltic account to transfer money out of Ukraine in 2011 ($4m…) How on earth can that not raise a GIGANTIC red flag ??? Seriously ???? When I see all the admin nightmare that comes with being a PEP…

For those unaware all such clients are only approved after due dilligence although we are supposed to believe that someone failed to spot the new client was the President of the Ukraine. Also if we switch to the share price plunge I looked at above apparently then some being ahead of the game is just find.

But really the absolute TOP story is this: reportedly (Dagens Nyheter) the bank told its 15 largest shareholders about the SVT broadcast on AML… two days ahead !! And now the bank says it was not insider information 🤣🤣

Those having something of a sense of deja vu about all this might be thinking of February 19th last year.

The Financial and Capital Markets Commission (FCMC) has imposed a moratorium on ABLV Bank, following a request by the European Central Bank (ECB). This means that temporarily, and until further notice, a prohibition of all payments by ABLV Bank on its financial liabilities has been imposed, and is now in effect.

Another money laundering problem and yet again one where the US authorities opened up the can of worms. Also the problems went as high as the central bank itself.

Latvian authorities prepared to explain the detention of ECB Governing Council member Ilmars Rimsevics by the anti-graft bureau in a weekend of activity culminating in the early-Monday imposition of a payment moratorium on the nation’s third-largest bank.

Comment

There are a lot of strands which collide here but the “war on cash” theme is rammed home by the fact that the ECB is on its case as it “could” cause illicit activity whereas banks that have done so get overlooked for quite some time. Care is needed as such activity crosses borders by definition and many of the activities highlighted above took place before the ECB was fully in charge as the Baltic countries joined the Euro more recently. But there is supposed to be an accession programme which should be including due diligence on banking activities. After all in the case of Latvia this ended up exceeding its annual economic output or GDP! Also it is the US authorities rather than the European ones who start the policing ball rolling.

Each saga involves misrepresentation and obfuscation from the directors of the bank or banks involved followed by ever larger numbers.

Moving onto happier news for the ECB this morning’s money supply release provided a bit of relief.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 6.6% in February from 6.2% in January.

Which led straight to this as there was a minor change in M2 but essentially M1 flowed into this.

Annual growth rate of broad monetary aggregate M3 increased to 4.3% in February 2019 from 3.8% in January.

So things did not get worse and in effect in narrow money terms we went back to December. Perhaps the better numbers from France I looked at on Tuesday helped. Thus we can expect Euro area economic growth to be slow but for there to be some overall.

The Investing Channel

How long before the ECB and Federal Reserve ease monetary policy again?

Yesterday brought something of a change to the financial landscape and it is something that we both expected and to some extent feared. Let me illustrate by combining some tweets from Lisa Abramowicz of Bloomberg.

Biggest one-day drop in 10-year yields in almost a year…..Futures traders are now pricing in a 47% chance of a rate cut by January 2020, up from a 36% chance ahead of today’s 2pm Fed release……….More steepening on the long end of the U.S. yield curve as investors price in more inflation in decades to come, thanks to a dovish Fed. The gap between 30-year & 10-year U.S. yields is now the widest since late 2017.

I will come to the cause of this in a moment but if we stick with the event we see that the ten-year US Treasury Note now yields 2.5%. The Trump tax cuts were supposed to drive this higher as we note that it was 3.24% in early November last year. So this has turned into something of a debacle for the “bond vigilantes” who are supposed to drive bond markets lower and yields higher in fiscal expansions. They have been neutered yet again and it has happened like this if I had you over to the US Federal Reserve and its new apochryphal Chair one Donald Trump.

US Federal Reserve

First we got this on Wednesday night.

The Federal Reserve decided Wednesday to hold interest rates steady and indicated that no more hikes will be coming this year. ( CNBC)

No-one here would have been surprised by the puff of smoke that eliminated two interest-rate increases. Nor by the next bit.

The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019. The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. ( Federal Reserve).

So as you can see what has become called Qualitative Tightening is on its way to fulfilling this description from Taylor Swift.

But we are never ever, ever, ever getting back together
Like, ever

More specifically it is being tapered in May and ended in September as we mull how soon we might see a return of what will no doubt be called QE4.

If we switch to the economic impact of this then the first is that it makes issuing debt cheaper for the US economy as the prices will be higher and yields lower. As President Trump is a fiscal expansionist that suits him. Also companies will be able to borrow more cheaply and mortgage rates will fall especially the fixed-rate ones. Here is Reuters illustrating my point.

Thirty-year mortgage rates averaged 4.28 percent in the week ended March 21, the lowest since 4.22 percent in the week of Feb. 1, 2018. This was below the 4.31 percent a week earlier, the mortgage finance agency said.

The average interest rate on 15-year mortgages fell 0.05 percentage point to 3.71 percent, the lowest since the Feb. 1, 2018 week.

Next week should be lower still.

Euro area

This morning has brought news which has caused a bit of a shock although not to regular readers here who recall this from the 27th of February.

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous.

The money supply numbers have worked really well as a leading indicator and better still are mostly ignored. Perhaps that is why so many were expecting a rebound this morning and instead saw this. From the Markit PMI business survey.

“The downturn in Germany’s manufacturing sector
has become more entrenched, with March’s flash
data showing accelerated declines in output, new
orders and exports……….the performance of the
manufacturing sector, which is now registering the
steepest rate of contraction since 2012.

The reading of 44.7 indicates a severe contraction in March and meant that overall we were told this.

Flash Germany PMI Composite Output Index at 51.5 (52.8 in Feb). 69-month low.

There is a problem with their numbers as we know the German economy shrank in the third quarter of last year and barely grew in the fourth, meaning that there should have been PMI readings below 50, but we do have a clear direction of travel.

If we combine this with a 48.7 Composite PMI from France then you get this.

The IHS Markit Eurozone Composite PMI® fell from
51.9 in February to 51.3 in March, according to the
preliminary ‘flash’ estimate. The March reading was
the third-lowest since November 2014, running only
marginally above the recent lows seen in December
and January.

Or if you prefer it expressed in terms of expected GDP growth.

The survey indicates that GDP likely rose by a modest 0.2% in the opening quarter, with a decline in manufacturing
output in the region of 0.5% being offset by an
expansion of service sector output of approximately
0.3%.

So they have finally caught up with what we have been expecting for a while now. Some care is needed here as the PMI surveys had a good start to the credit crunch era but more recent times have shown problems. The misfire in the UK in July 2016 and the Irish pharmaceutical cliff for example. However, central bankers do not think that and have much more faith in them so we can expect this morning’s release to have rather detonated at the Frankfurt tower of the ECB. It seems financial markets are already rushing to front-run their expected response from @fastFT.

German 10-year bond yield slips below zero for first time since 2016.

In itself a nudge below 0% is no different to any other other basis point drop mathematically but it is symbolic as the rise into positive territory was accompanied by the Euro area economic recovery. Indeed the bond market has rallied since that yield was 0.6% last May meaning that it has been much more on the case than mainstream economists which also warms the cockles of one former bond market trader.

More conceptually we are left wonder is the return to something last seen in October 2016 was sung about by Muse.

And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole

If we now switch to ECB policy it is fairly plain that the announcement of more liquidity for the banks ( LTTRO) will be followed by other easing. But what? The problem with lowering interest-rates is that the Deposit-Rate is already at -0.4%. Some central bankers think that moving different interest-rates by 0.1% or 0.2% would help which conveniently ignores the reality that vastly larger ones overall ( 4%-5%) have not worked.

So that leaves more bond buying or QE and beyond that perhaps purchases of equities and commercial property like in Japan.

Comment

I have been wondering for a while when we would see the return of monetary easing as a flow and this week is starting to look a candidate for the nexus point. It poses all sorts of questions especially for the many countries ( Denmark, Euro area, Japan, Sweden. and Switzerland) which arrive here with interest-rates already negative. It also leaves Mark Carney and the Bank of England in danger of another hand brake turn like in August 2016.

The Committee continues to judge that, were the economy to develop broadly in line with those projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Although of course it could be worse as the Norges Bank of Norway may have had a false start.

Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.0 percent:

But the real problem is that posed by Talking Heads because after the slashing of interest-rates and all the QE well let me hand you over to David Byrne.

And you may ask yourself, well
How did I get here?

 

Deutsche Bank and Commerzbank will soon be telling us bigger is best

The weekend just gone has seen a surge in speculation about a matter we have been expecting for some time. It is this issue of solving the problem of a bank that is too big to fail by making it even bigger! Why might this be? Well let us go back a little more than two years to February 2nd 2017.

The bank’s net loss narrowed to 1.89 billion euros in the three months through December, from a loss of 2.12 billion euros a year earlier. Analysts had expected a shortfall of 1.32 billion euros.

As I pointed out it was not supposed to be like that as the background for banking was good.

As I look at this there is the simple issue of yet another loss. After all the German economy is doing rather well with economic growth of 1.9% in 2016 and the unemployment rate falling to 5.9% with employment rising. So why can’t Deutsche Bank make any money?

It has continually blamed “legacy issues” but we find if we advance two years and a bit in time that it is still in something of a morass. Actually in terms of those willing to back its future with their money things look much worse as the share price in February 2017 was 16.6 Euros according to my monthly chart as opposed to the 7.85 Euros as I type this. So one option which is a(nother) rights issue faces the problem that to do any good existing shareholders would be diluted substantially.

What is happening?

From Reuters.

Berlin is so worried about the health of Deutsche Bank that it pushed for a merger with rival Commerzbank even though it could open up a huge financial shortfall, a German official told Reuters.

As we wonder how huge is “huge”? Let us remind ourselves that the German public finances are in strong shape. Germany is running a fiscal surplus and has been reducing its national debt in both absolute and relative terms. Indeed as the last relative number of 61% of GDP (Gross Domestic Product) was for the third quarter of last year Germany may now qualify under the Maastricht Treaty rules. So it could borrow more to cover even a “huge” amount and as we stand can do so very cheaply with the ten-year bund yield a mere 0.07%.

I cannot say I have much faith in the explanation for the losses though as the QE bond buying of Mario Draghi and the ECB has created large profits for most European sovereign bondholders.

The German official said that any tie-up would likely result in a multi-billion-euro hole because a switch in bank ownership legally triggers a revaluation of assets such as government bonds.

They would be revalued at a market price which is typically lower than the one registered on the accounts. A second source, who is familiar with the talks, said they also expected a shortfall after the potential merger.

I think we will find it is other assets which will be causing the trouble and the explanation is something of a smokescreen. It also looks like there has been some “mark to fantasy” going on in the accounts which seems most likely to have taken place in illiquid bonds and derivatives.

As we continue our look don’t they mean 2008 (and maybe 2011/12) as well as 2016?

“In 2016 … Deutsche went to the brink,” said the first official. “They haven’t really got out of that hole…It’s legitimate to ask:… how dangerous is that with systematic relevance?”

This contrasts with the official rhetoric.

Deutsche Bank has said it is stable. Last month, as it announced a return to profit in 2018, its chief executive Christian Sewing said it was “on the right track” for growth and lower costs.

It would appear that Herr Sewing is unaware of the meaning of the phrase “the right track” provided by the Greek crisis where it led to people singing along to AC/DC.

I’m on the highway to hell
On the highway to hell
Highway to hell
I’m on the highway to hell.

Also as a reminder the IMF ( International Monetary Fund ) reported this back in the summer of 2016.

Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC (HSBA.L) and Credit Suisse (CSGN.S)………..The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures.

The story of the last decade is that the problems of Deutsche Bank have never really gone away and in fact have got worse when the economy got better. Should the present period of economic weakness continue then the heat will be not only be turned up a notch or two. As to the legality of all this then surely it should be blocked on competition grounds but when “the precious” is involved matters like that seem to disappear in a puff of smoke.

Meanwhile as Johannes Borgen pointed out at the end of last week maybe the ground has been tilled a little.

I have just realised that Germany passed a law to make redundancies easier for high earners. Those fat cat bankers at Deutsche must feel slightly nervous. How bad must the government want this deal, to make a law only to facilitate it…

The economy

This morning has brought more information on the ongoing economic slow down. From Germany Statistics.

 In January 2019, production in industry was down by 0.8% from the previous month on a price, seasonally and calendar adjusted basis and -3.3% on the same month a year earlier.

December was revised higher but in return January saw another fall meaning that the word temporary is being stretched again. As to the cause well here is a brake on things.

Automobile production fell by 9.2 percent on the month in January, separate data from the Economy Ministry showed. ( Reuters)

Also whilst the world economy will welcome a reduction in one of its imbalances the German one will be slowing because of this.

The foreign trade balance showed a surplus of 14.5 billion euros in January 2019. In January 2018, the surplus amounted to 17.2 billion euros.

According to BreakingTheNews this is hitting official forecasts.

Germany’s government lowered its gross domestic product (GDP) projections for the country in 2019 to 0.8%, Handelsblatt reported on Monday, quoting a confidential note sent by the Ministry of Finance.

Comment

This year has seen more than a few zombie banks return to the news like a financial version of hammer house of horror. We have seen Novo Banco ( Portugal) leaching from the state and a row of Italian banks as well as NordLB of Germany. But Deutsche Bank has returned and the situation is in many ways dominated by this from Reuters BreakingViews.

Lastly, how will a combined bank achieve a 10 percent return on its capital? Deutsche made a piddling 0.5 percent return in 2018 and Commerzbank a paltry 3.4 percent.

Putting it simply Deutsche Bank has not only lost its mojo it lacks any real form of business model. Commerzbank has made a little progress but only by escaping the supermassive black hole of investment banking as we note that a merger would bring it back within that area’s event horizon.

Or to put it another way it is hard to keep a straight face when this is presented as a way of helping with the issue of too big to fail

Deutsche Bank’s chairman Paul Achleitner is also an advocate for a merger that would create the eurozone’s second-largest bank with close to €1.9tn in assets. ( Financial Times)

Podcast

 

 

 

 

Mario Draghi and the ECB look for more expansionary Euro area fiscal policy

As we travel the journey that is the credit crunch era we pick up some tasty morsels of knowledge along the way. Some were provided by Mario Draghi and the European Central Bank yesterday which announced this.

we decided to launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III), starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy.

As ever “the precious” otherwise known as the banks is prioritised ahead of everything else. Also I was asked if this meant the ECB “knew something” to which the answer is simple, if they did then they would have done it last summer. But there was a much bigger pivot.

This happens in a context where the debt to GDP ratio in the eurozone is actually falling.

There was a move towards making a broad hint for more fiscal policy or easing here. Mario also went out of his way to point out that borrowing for Euro area governments is very low.

The simple action of maintaining the stock unchanged in this context actually is a continuous easing because interest rates are pushed downward by this action. You can see this because since we decided in June last year, interest rates have gone down, they keep on going down, the term premium is negative, so conditions are very, very accommodative.

Not only that but he intends to keep it that way.

If you add to this what I’ve just said, it’s the chained element of this, of the horizon over which we’ll carry out purchases to keep the stock unchanged moves together with the forward guidance.

So Mario is pointing out to government’s that if they borrow the ECB will in general be there to help keep borrowing costs low or as we shall see in a bit negative. After all we now live in a world where even Greece can do this.

On Tuesday 5thMarch the Hellenic Republic, rated B1 Moody’s/ B+ S&P/ BB- Fitch/ BH DBRS (stb/ pos/ stb/ pos), priced a €2.5 billion 10-year Government Bond (GGB) due 12th March 2029. The new benchmark carries a coupon of 3.875% and reoffer yield of 3.900%, equating to a reoffer price of 99.796%. Joint bookrunners on the transaction were BNP Paribas, Citi, Credit Suisse, Goldman Sachs Intl, HSBC and J.P. Morgan. ( Note the past behaviour of Goldman Sachs in relation to Greece seems to be no barrier at all to future business…..)

Why so cheap? Well there are two main factors. One is that it is looking to run fiscal surpluses and the other is that whilst it is not in the ECB QE programme it may well be in a future one and that is looking more likely by the day. As to the economy it is with a heavy heart that I point out this which speaks for itself.

The available seasonally adjusted data
indicate that in the 4 th quarter of 2018 the Gross Domestic
Product (GDP) in volume terms decreased by 0.1% in comparison with the 3rd quarter of 2018,
while in comparison with the 4th quarter of 2017, it increased by 1.6%.

Mario also gave us a reminder of the scale of Euro area bond buying so far.

Just to give you an idea, the balance sheet of the ECB is about 42 – 43% of the eurozone GDP. The Fed is about half of it now. In order to keep this stock unchanged, we continue purchasing something in the order of €20 billion a month of bonds.

Here are more hints on the subject with also I think a nod to his home country Italy.

Regarding fiscal policies, the mildly expansionary euro area fiscal stance and the operation of automatic stabilisers are providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should continue to increase efforts to achieve a more growth-friendly composition of public finances.

Bond Yields

Let us start with the largest Euro area economy with is Germany. We saw bond prices rise and yields fall quite quickly in response to this. The German ten-year yield fell from 0.12% to 0.06% which makes us wonder if we may see another spell of it going negative like it did in the summer and autumn of 2016? It would not take a lot as the nine-year yield is now -0.1%.

So Germany can borrow essentially for nothing should it so choose over a ten-year horizon. That is in nominal terms and if we see inflation in this period then the real cost will be negative. Yet if you read through the cheerleading it is aiming for a fiscal surplus.

The general government budget surplus
will fall from roughly 1½% of GDP in
2018 to roughly 1% of GDP in 2019.
In 2019 and subsequent years, a fiscal
impact will be made in particular by
the priority measures contained in the
Coalition Agreement and other measures.
The implementation of these measures
will reduce the federal budget surplus. ( Draft Budget October 2018).

Although those numbers are already suffering from the TalkTalk critique and on that subject RIP Mark Hollis.

Baby, life’s what you make it
Celebrate it
Anticipate it
Yesterday’s faded
Nothing can change it
Life’s what you make it

Why? Well we have indeed moved on since this as the German economy shrank in the second half of 2018.

which forecasts a real growth rate of 1.8% in both 2018 and
2019. This means that Germany’s economy is expected to keep growing at a pace that slightly exceeds potential output.

Also if we look around we see that European supranational bodies can borrow very cheaply too. Maybe not at German rates but often pretty near. After considering that now let us return to Mario Draghi yesterday.

Now, Philip Lane is an excellent acquisition for the ECB but we are not going to ask him about this Eurobond thing. The Eurobond is again not something that the ECB can force or just decide about; again it’s an inherently political decision. And of course this doesn’t detract at all from the argument that it’s absolutely rational to have a safe asset at European level.

We have seen the Eurobond case made many times and so far Germany keeps torpedoing it, but we also know that in Europe these sort of things tend to happen eventually after of course a forest of denials and rejections.

Comment

We have seen quite a few phases now of the Euro area crisis. For a while it looked like “escape velocity” had been achieved but now we see to be facing many of the same problems with quarterly economic growth having gone 0.1%, 0.2% and looking like being around 0.2% in the first quarter of this year. Although he tried to downplay such thoughts yesterday it is hard not to think of this from Mario Draghi last November.

 I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Ironically he is avoiding the subject just as the evidence is pointing that way. For the moment monetary policy is to coin a phrase “maxxed out” although in this instance it is more timing than not being able to do more, as it would be an embarrassing U-Turn. So for now if Euro area government’s and especially Germany were to embark on a fiscal stimulus the ECB would turn its blind eye towards it I think.