The rise and rise of negative interest-rates

The modern era has brought something that has been in motion all my career, although there have been spells which did not feel like that. I am discussing bond yields which have been in a secular decline since the 1980s. Regular readers will be aware that back when I was new to this arena I asked Legal and General why they were buying a UK Gilt that yielded 15%? Younger readers please feel free to delete such a number from your memories if it is all too much. But there is another shift as back then the benchmark was 20 years and not 10. However you look at it from that perspective a world in which both the 2 and 5 year UK bond or Gilt yields were around -0.13% would have been considered impossible it not unpossible.

Germany

These have been the leaders of the pack in terms of negative bond yields. Last week Germany sold a benchmark 10 year bond with no coupon at all. We should take a moment to consider this as a bond is in theory something with a yield or coupon so as it does not have one we are merely left with money being borrowed and then repaid. Except there was a catch there too as not all of it will be repaid. The price paid was 105.13 on average and you will only get 100 back. Or if you prefer a negative yield of the order of 0.5% per year.

This year has brought something that in the past would have ended the situation as this.

The German Federal Government intends to issue fixed income Government securities with an aggregate volume of € 210 billion in 2020 to finance
the Federal Government budget and its special funds.

Became this.

The auction volume in the first two quarters of the current year amounted to € 97 billion for nominal capital market instruments (planned at the beginning of the year: € 78 billion) and € 87.5 billion for money market instruments (planned at the beginning of the year: € 31 billion)…….Due to the adjustments, the third quarter auction volume for nominal capital market instruments will total € 74 billion (planned at the beginning of the year: € 41 billion).

As you can see there were considerably more bonds on offer but it has made little or no difference to investors willingness to accept a maturity loss or negative yield. Oh and maybe even more bonds are on the way.

In non-regular reopenings on 1 and 16 April, a total amount of € 142 billion of already existing Federal securities was issued directly into the Federal government’s own holdings. These transactions created the possibility to react flexibly to short-term liquidity requirements.

So we learn that the previous reality that Germany was benefiting from its austere approach to public finances was not much of an influence. Previously it has been running a fiscal surplus and repaying debt.

Switzerland

The benchmark yield is very similar here as the 10 year yield is -0.49%. There are many similarities in the situation between Germany and Switzerland but one crucial difference which is that Switzerland has its own currency. The Swiss Franc remains very strong in spite of an interest-rate of -0.75% that has begun to look ever more permanent which is an irony as the 1.20 exchange-rate barrier with the Euro was supposed to be that. The reality is that the exchange-rate over five years after the abandonment of that is stronger at just below 1.08.

So a factor in what we might call early mover status is a strong currency. This also includes the Euro to some extent as we note ECB President Lagarde was on the wires over the weekend.

ECB Lagarde Says Euro Gains Have Blunted Stimulus Boost to Inflation … BBG

This allows us to bring in Japan as well as the Yen has remained strong in spite of all the bond buying of the Bank of Japan.

Safe Haven

The ECB issued a working paper on this subject in January.

There is growing academic and policy interest in so called “safe assets”, that is assets that have stable nominal payoffs, are highly liquid and carry minimal credit risk.

Notice the two swerves which are the use of “stable nominal payoffs” and “minimal credit risk”. The latter is especially noticeable for a place like the ECB which insisted there was no credit risk for Greece, which was true for the ECB but not everyone else.

Anyway it continues.

After the global financial crisis, the demand for safe assets has increased well beyond its supply, leading to an increase in the convenience yield and therefore to the interest that these assets pay. High demand for safe assets has important macroeconomic consequences. The equilibrium safe real interest rate may in fact decline well below zero.

They also note a feature we have been looking at for the best part of a decade now.

In this situation, one of the adjustment mechanisms is the appreciation of the currency of issuance of the safe asset, the so called paradox of the reserve currency.

Quantitative Easing

The problem for the theory above is that the central banks who love to push such theories ( as it absolves them of blame) are of course chomping on safe assets like they are their favourite sweets. Indeed there is a new entrant only this morning, or more accurately an expansion from an existing player.

The Executive Board of the Riksbank has decided to initiate purchases of corporate bonds in the week beginning 14 September 2020. The purchases will keep
companies’ funding costs down and reinforce the Riksbank’s capacity to act if the credit supply to companies were to deteriorate further as a result of the corona pandemic. On 30 June 2020, the Executive Board decided that, within its programme for bond purchases, the Riksbank would offer to purchase corporate bonds to a
nominal amount of SEK 10 billion between 1 September 2020 and 30 June 2021.

There are all sorts of issues with that but for today’s purpose it is simply that the push towards negative interest-rates will be added to. Or more specifically it will increasingly spread to higher risk assets. We can be sure however that should some of these implode it will be nobody’s fault as it could not possibly have been predicted.

Meanwhile ordinary purchases around the world continue including in my home country as the Bank of England buys another £1.45 billion of UK bonds or Gilts.

Comment

There are other factors in play. The first is that we need to try to look beyond the present situation as we note this from The Market Ear.

the feedback loop…”the more governments borrow, the less it seems to cost – giving rise to calls for still more borrowing and spending”. ( Citibank)

That misses out the scale of all the central bank buying which has been enormous and gets even larger if we factor in expected purchases. The US Federal Reserve is buying US $80 billion per month of US Treasuries but with its announcement of average inflation targeting seems likely to buy many more

Also the same Market Ear piece notes this.

The scalability of modern technology means that stimulus is going into asset price inflation, not CPI

Just no. What it means is that consumer inflation measures have been manipulated to avoid showing inflation in certain areas. Thus via Goodhart’s Law and/or the Lucas Critique we get economic policy based on boosting prices in these areas and claiming they are Wealth Effects when for many they are inflation.

We get another shift because if we introduce the issue of capital we see that up to know bond holders will not care much about negative yields as they have been having quite a party. Prices have soared beyond many’s wildest dreams. The rub as Shakespeare would put it is that going forwards we face existing high prices and low or negative yields. It used to be the job of central banks to take the punch bowl away when the party gets going but these days they pour more alcohol in the bowl.

Meanwhile from Friday.

UK SELLS 6-MONTH TREASURY BILL WITH NEGATIVE YIELD AT TENDER, FIRST TIME 6-MONTH BILL SOLD AT NEGATIVE YIELD ( @fiquant )

Podcast

 

 

 

 

Trouble mounts for the ECB and Christine Lagarde

Today is ECB ( European Central Bank ) day where we get the results of their latest deliberations. We may get a minor move but essentially it is one for what we have come to call open mouth operations. This is more than a little awkward when the President has already established a reputation for putting her Hermes shod foot in her mouth. Who can forget this from March 12th?

Lagarde: We are not here to close spreads, there are other tools and other actors to deal with these issues.

If you are ever not sure of the date just take a look at a chart of the Italian government bond market as it is the time when the benchmark ten-year yield doubled. As many put it the ECB had gone from “Whatever it takes” to “Whatever.”

This issue has continued and these days President Lagarde reads from a script written for her which begs the issue of whether the questions from the press corps are known in advance? It also begs the issue of who is actually in charge? This is all very different from when prompted by an admiring Financial Time representative she was able to describe herself as a “wise owl” like her brooch. Whoever was in charge got her to change her tune substantially on CNBC later and got a correcting footnote in the minutes.

I am fully committed to avoid any fragmentation in a difficult moment for the euro area. High spreads due to the coronavirus impair the transmission of monetary policy. We will use the flexibility embedded in the asset purchase programme, including within the public sector purchase programme. The package approved today can be used flexibly to avoid dislocations in bond markets, and we are ready to use the necessary determination and strength.

Next comes her promise to unify the ECB Governing Council and have it singing from the same hymn sheet, unlike the term of her predecessor Mario Draghi. This has been crumbling over the past day or two as we have received reports of better economic expectations from some ECB members. This has been solidified by this in Eurofi magazine today.

Now that we have moved past the impact phase of the shock, we can shift our attention toward the recovery phase. Recently, forward looking confidence indicators look robust, while high frequency data suggest that mobility is recovering. These developments solidify the confidence in our baseline projection with a more favorable balance-of-risks. However, even if no further setbacks materialize
economic activity will only approach pre-corona levels at the end of 2022.

That is from Klass Knot the head of the DNB or Netherlands central bank and any doubts about his view are further expunged below.

Relying too heavily on monetary policy to get the job done might have contributed to perceptions of a “central bank put” in the recovery from the euro area debt crisis, where the ECB bore all of the downside risk to the economy.

Might?!

Also it was only a week ago we were getting reports ( more “sauces” ) that the ECB wanted to get the Euro exchange-rate lower. Whereas so far on announcement day it has talked it up.

The Economy

There are several issues here of which the first was exemplified by Eurostat on Tuesday.

The COVID-19 pandemic also had a strong impact on GDP levels. Based on seasonally adjusted figures, GDP
volumes were significantly lower than the highest levels of the fourth quarter of 2019 (-15.1% in the euro area and
-14.3% in the EU). This corresponds to the lowest levels since the the first quarter of 2005 for the euro area.

Such a lurch downwards has these days a duo fold response. What I mean by that os that central banks have got themselves into the trap of responding to individual events which they can do nothing about. The real issue is where the economy will be by the time the policy response ( more QE and a -1% interest-rate for banks) can actually take effect. I still recall an ECB paper which suggested response times had got longer and not shorter as some try to claim.

Accordingly I can only completely disagree with those who say this should be an influence.

In August 2020, a month in which COVID-19 containment measures continued to be lifted, Euro area annual
inflation is expected to be -0.2%, down from 0.4% in July according to a flash estimate from Eurostat,

For a start there are ongoing measurement issues and anyway the boat has sailed. The more thoughtful might wonder how this can happen with all the effort to raise recorded inflation? But they are usually ignored.

Next the new optimism rather collides with this from a week ago.

In July 2020, a month marked by some relaxation of COVID-19 containment measures in many Member States, the seasonally adjusted volume of retail trade decreased by 1.3% in the euro area and by 0.8% in the EU, compared
with June 2020, according to estimates from Eurostat.

That is for July so in these times a while ago but we also face the prospect of more restrictions and maybe more lock downs. If we look at the news from France earlier production was better in July but still well below February.

 Compared to February (the last month before the start of the general lockdown), output declined in the manufacturing industry (−7.9%), as well as in the whole industry (−7.1%).

Italy has different numbers but a similar pattern.

In July 2020 the seasonally adjusted industrial production index increased by 7.4% compared with the previous month. The change of the average of the last three months with respect to the previous three months was 15.0%.

The calendar adjusted industrial production index decreased by 8.0% compared with July 2019 (calendar working days in July 2020 being the same as in July 2019).

The unadjusted industrial production index decreased by 8.0% compared with July 2019.

Comment

We start with two issues which are that some of the ECB are singing along with D:Ream.

Things can only get better
Can only get better if we see it through
That means me and I mean you too.

That is a little awkward if you want to talk the currency down as we note the FT has a claimed scoop which catches up with us from a week ago.

Scoop: For the first time in more than two years, the
@ECB  is expected to include a reference to the exchange rate in today’s “introductory statement” – here’s four things to watch for as the euro’s strength raises alarms at the central bank.

Then there is the background issue that Mario Draghi who knows Christine Lagarde well thought he was setting monetary policy for her last autumn when the Deposit Rate was cut to -0.5% and a reintroduction of QE was announced. So she would have a year or more to bed in and read up on monetary policy. What could go wrong?

This is a contentious area so let me be clear.Appointing a woman to the role was in fact overdue. The problem is that diversity is supposed to bring new talent of which there are many whereas the establishment only picks ones from their club. In this instance there were two steps backwards. The first is simply Christine Lagarde’s track record which includes a conviction for negligence. Next is the fact that the ECB is now headed by two politicians as the reverse takeover completes and it can set about helping current politicians by keeping debt costs low and sometimes negative. The irony is that if you go back to the beginning of this post Christine Lagarde seems to have failed to grasp even that.

The Investing Channel

France decides to Spend! Spend! Spend!

Yesterday brought something that was both new and familiar from France. The new part is a substantial extra fiscal stimulus. The familiar is that France as regular readers will be aware had been pushing the boundaries of the Euro area fiscal rules anyway, This is something which has led to friction with Italy which has come under fire for its fiscal position. Whereas France pretty much escaped it in spite of having its nose pressed against the Growth and Stability Pact limit of 3% of Gross Domestic Product for the fiscal deficit. Actually that Pact already feels as if it is from a lifetime ago although those who have argued that it gets abandoned when it suits France and Germany are no doubt having a wry smile.

The Details

Here is a translation of President Macron’s words.

We are now entering a new phase: that of recovery and reconstruction. To overcome the most important in our modern history, to prevent the cancer of mass unemployment from setting in, which unfortunately our country has suffered too long, today we decide to invest massively. 100 billion, of which 40 billion comes from financing obtained hard from the European Union, will thus be injected into the economy in the coming months. It is an unprecedented amount which, in relation to our national wealth, makes the French plan one of the most ambitious.

So the headline is 100 billion Euros which is a tidy sum even in these inflated times for such matters. Also you will no doubt have spotted that he is trying to present something of a windfall from the European Union which is nothing of the sort. The money will simply be borrowed collectively rather than individually. So it is something of a sleight of hand. One thing we can agree on is the French enthusiasm for fiscal policy, although of course they have been rather less enthusiatic in the past about such policies from some of their Euro area partners.

There are three components to this.

Out of 100 billion euros, 30 billion are intended to finance the ecological transition.

As well as a green agenda there is a plan to boost business which involves 35 billion Euros of which the main component is below.

As part of the recovery plan, production taxes will be reduced by € 10bn from January 1, 2021, and by sustainable way. It is therefore € 20bn in tax cuts of production over 2021–2022.

That is an interesting strategy at a time of a soaring fiscal deficit to day the least. So far we have ecology and competitiveness which seems to favour big business. Those who have followed French history may enjoy this reference from Le Monde.

With an approach that smacks of industrial Colbertism

The remaining 35 billion Euros is to go into what is described as public cohesion which is supporting jobs and health. In fact the jobs target is ambitious.

According to the French government, the plan will help the economy make up for the coronavirus-related loss of GDP by the end of 2022, and help create 160,000 new jobs next year.  ( MarketWatch)

Is it necessary?

PARIS (Reuters) – French Finance Minister Bruno Le Maire believes that the French economy could perform better than currently forecast this year, he said on Friday.

“I think we will do better in 2020 than the 11% recession forecast at the moment,” Le Maire told BFM TV.

I suspect Monsieur Le Maire is a Beatles fan and of this in particular.

It’s getting better
Since you’ve been mine
Getting so much better all the time!

Of course things have got worse as he has told us they have got better. Something he may have repeated this morning.

August PMI® data pointed to the sharpest contraction in French construction activity for three months……….At the sub-sector level, the decrease in activity was broad based. Work undertaken on commercial projects fell at the
quickest pace since May, and there was a fresh decline in civil engineering activity after signs of recovery in June and July. Home building activity contracted for the sixth month running, although the rate of decrease was softer than in July. ( Markit)

We have lost a lot of faith in PMi numbers but even so there is an issue as I do not know if there is a French equivalent of “shovel ready”? But construction is a tap that fiscal policy can influence relatively quickly and there seems to be no sign of that at all.

Indeed the total PMI picture was disappointing.

“The latest PMI data came as a disappointment
following the sharp rise in private sector activity seen
during July, which had spurred hopes that the French
economy could undergo a swift recovery towards precoronavirus levels of output. However, with activity
growth easing considerably in the latest survey period,
those hopes have been dashed…”

So the data seems to be more in line with the view expressed below.

It is designed to try to “avoid an economic collapse,” French Prime Minister Jean Castex said on Thursday. ( MarketWatch)

Where are the Public Finances?

According to the Trading Economics this is this mornings update.

France’s government budget deficit widened to EUR 151 billion in the first seven months of 2020 from EUR 109.7 billion a year earlier, amid efforts to support the economy hit by the coronavirus crisis. Government spending jumped 10.4 percent from a year earlier to EUR 269.3 billion, while revenues went down 6.3 percent to EUR 142.25 billion

I think their definition of spending has missed out debt costs.

As of the end of June the public debt was 1.992 trillion Euros.

Comment

I have avoided being to specific about the size of the contraction of the economy and hence numbers like debt to GDP. There are several reasons for this. One is simply that we do not know them and also we do not know how much of the contraction will be temporary and how much permanent? We return to part of yesterday’s post and France will be saying Merci Madame Lagarde with passion. The various QE bond purchase programmes mean that France has a benchmark ten-year yield of -0.18% and even long-term borrowing is cheap as it estimates it will pay 0.57% for some 40 year debt on Monday. That’s what you get when you buy 473 billion Euros of something and that is just the original emergency programme or PSPP and not the new emergency programme or PEPP. On that road the European Union fund is pure PR as it ends up at the ECB anyway.

The Bank of France has looked at the chances of a rebound and if we look at unemployment and it looks rather ominous.

However, the speed of the recovery in the coming months and years is more uncertain, as is the peak in the unemployment rate, which the Banque de France forecasts at 11.8% in mid-2021 for France……….Chart 1 shows that in France, Germany, Italy, and the United States, once the unemployment rate peaked, it fell at a rate that was fairly similar from one crisis to the next: on average 0.55 percentage point (pp) per year in France and Italy, 0.7 pp in Germany, and 0.63 pp in the United States.

There is not much cheer there and they seem to have overlooked that unemployment rates have been much higher in the Euro area than the US. But we can see how this might have triggered the French fiscal response especially at these bond yields.

But Giulia Sestieri is likely to find that her conclusion about fiscal policy is likely to see the Bank of France croissant and espresso trolley also contain the finest brandy as it arrives at her desk.

Ceteris paribus, the lessons of economic literature suggest potentially large fiscal multipliers during the post-Covid19 recovery phase

Mind you that is a lot of caveats for one solitary sentence.

The ECB would do well to leave the Euro exchange-rate alone.

Over the past 24 hours we have seen something of a currency wars vibe return. This has other links as we mull whether for example negative interest-rates can boost currencies via the impact of the Carry Trade? In which case economics 101 is like poor old HAL 9000 in the film 2001. As so often is the case the Euro is at the heart of much of it and the Financial Times has taken a break from being the house paper of the Bank of England to take up the role for the ECB.

The euro’s rise is worrying top policymakers at the European Central Bank, who warn that if the currency keeps appreciating it will weigh on exports, drag down prices and intensify pressure for more monetary stimulus. Several members of the ECB’s governing council told the Financial Times that the euro’s rise against the US dollar and many other currencies risks holding back the eurozone’s economic recovery. The council meets next week to discuss monetary policy.

There are a range of issues here. The first is that we are seeing an example of what have become called ECB “sauces” rather then sources leak suggestions to the press to see the impact. Next we are left mulling if the ECB actually has any “top policymakers” as the FT indulges in some flattery. Especially as we then head to a perversion of monetary policy as shown below where lower prices are presented as a bad thing.

drag down prices

So they wish to make workers and consumers worse off ( denying them lower prices) whilst that the economy will be boosted bu some version of a wish fairy. Actually the sentence covers a fair bit of economic theory and modern reality so let us examine it.

The Draghi Rule

Back in 2014 ECB President Draghi gave us his view of the impact of the Euro on inflation.

Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

There is a problem with the use of the word “permanent” as exchange-rate moves are usually anything but, However since the nadir in February when the Euro fell to 95.6 it has risen to 101.9 or 6.3 points. Thus we have a disinflationary impact of a bit under 0.3%. That is really fine-tuning things and feels that the ECB has been spooked by this.

In August 2020, a month in which COVID-19 containment measures continued to be lifted, Euro area annual
inflation is expected to be -0.2%, down from 0.4% in July……..

Perhaps nobody has told them they are supposed to be looking a couple of year ahead! This is reinforced by the detail as the inflation fall has been mostly driven by the same energy prices which Mario Draghi argued should be ignored as they are outside the ECB’s control.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest
annual rate in August (1.7%, compared with 2.0% in July), followed by services (0.7%, compared with 0.9% in
July), non-energy industrial goods (-0.1%, compared with 1.6% in July) and energy (-7.8%, compared with -8.4% in
July).

The Carry Trade

This is the next problem for the “top policymakers” who appear to have missed it. Perhaps economics 101 is the only analysis allowed in the Frankfurt Ivory Tower, which misses the reality that interest-rate cuts can strengthen a currency. Newer readers may like to look up my articles on why the Swiss Franc surged as well as the Japanese Yen. But in simple terms investors borrow a currency because it terms of interest-rate (carry) it is cheaper. With an official deposit rate of -0.5% and many negative bond yields Euro borrowing is cheap. So some will borrow in it and cutting interest-rates just makes it cheaper and thereby even more attractive.

As an aside you may have spotted that a potential fix is for others to cut their interest-rates which has happened in many places. But with margins thin these days I suspect investors are playing with smaller numbers. You may note that this is both dangerous and a consequence of the QE era so you can expect some official denials to be floating around.

The Euro as a reserve currency

This is a case of be careful what you wish for! I doubt the current ECB President Christine Lagarde know what she was really saying when she put her name to this back in June.

On the one hand, the euro’s share in outstanding international loans increased significantly.

Carry Trade anyone? In fact you did not need to look a lot deeper to see a confession.

Low interest rates in the euro area continued to support the use of the euro as a funding currency – even after adjusting for the cost of swapping euro proceeds into other currencies, such as the US dollar.

The ECB has wanted the Euro to be more of a reserve currency so it is hard for it then to complain about the consequences of that which will be more demand and a higher price. Perhaps they did not think it through and they are now singing along with John Lennon.

Nobody told me there’d be days like these
Nobody told me there’d be days like these
Nobody told me there’d be days like these
Strange days indeed — strange days indeed

Economic Output

Mario Draghi was more reticent about the impact of a higher Euro on economic output which is revealing about the ECB inflation obsession. But back in 2014 when there were concerns about the Euro CaixaBank noted some 2008 research.

Since January 2013, the euro’s nominal effective exchange rate has appreciated by approximately 5.0%. Based on a study by the ECB,an increase of this size reduces exports by 0.6 p.p. in the first year and by close to 1.0 p.p. cumulative in the long term.

With trade being weaker I would expect the impact right now to be weaker as well. Indeed the Reserve Bank of Australia has pretty much implied that recently with the way it has looked at a higher Aussie Dollar which can’t impact tourism as much as usual for example, because there is less of it right now.

Comment

One context of this is that a decade after the “currency wars” speech from the Brazilian Finance Minister we see that we are still there. This is a particular issue for the Euro area because as a net exporter with its trade and balance of payments surplus you could argue it should have a higher currency as a type of correction mechanism. After all it was such sustained imbalances that contributed to the credit crunch and if you apply purchasing power parity to the situation then according to the OECD the exchange rate to the US Dollar should be 1.42 so a fair bit higher. There are always issues with the precision of such calculations but much higher is the answer. Thus reducing the value of the Euro from here would be seeking a competitive advantage and punishing others.

Next comes the way that this illustrates the control freakery of central bankers these days who in spite of intervening on an extraordinary scale want to intervene more. It never seems to occur to them that the problems are increasingly caused by their past actions.

The irony of course is that the elephant in the room which is the US Dollar mat have seen a nadir with the US Federal Reserve averaging inflation announcement. If so we learn two things of which the first is that the ECB may work as an (inadvertent) market indicator. The second is that central banks may do well to leave this topic alone as it is a sea bed with plenty of minefields in it. After all with a trade-weighted value of 101.53 you can argue it is pretty much where it started.

 

 

 

 

How do the negative interest-rates of the ECB fit with a surging money supply?

Today brings an opportunity for us to combine the latest analysis from the European Central Bank with this morning’s money supply and credit data. The speech is from Executive Board member Isabel Schnabel who is apparently not much of a fan of Denmark or Sweden.

In June 2014, the ECB was the first major central bank to lower one of its key interest rates into negative territory.

Of course the effect of the Euro was a major factor in those countries feeling the need for negativity but our Isabel is not someone who would admit something like that. We do however get a confession that the ECB did not know what the consequences would be.

As experience with negative interest rates was scant, the ECB proceeded cautiously over time, lowering the deposit facility rate (DFR) in small increments of 10 basis points, until it reached -0.5% in September 2019. While negative interest rates have, over time, become a standard instrument in the ECB’s toolkit, they remain controversial, both in central banking circles and academia.

Unfortuately for Isabel she has been much more revealing here than she intended. In addition to admitting it was new territory there is a confession the Euro area economy has been weak as otherwise why did they feel the need to keep cutting the official interest-rate? Then the “standard instrument” bit is a confession that they are here to stay.

In spite of the problems she has just confessed to Isabel thinks she can get away with this.

In my remarks today, I will review the ECB’s experience with its negative interest rate policy (NIRP). I will argue that the transmission of negative rates has worked smoothly and that, in combination with other policy measures, they have been effective in stimulating the economy and raising inflation.

Even before the Covid-19 pandemic that was simply untrue. You do not have to take me word for it because below is the policy announcement from the ECB on the 12th of September last year. They did not so that because things were going well did they?

The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%…….Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November.

The accompanying statement included a complete contradiction of what Isabel is trying to claim now.

Today’s decisions were taken in response to the continued shortfall of inflation with respect to our aim. In fact, incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures.

I wonder if anyone challenged Isabel on this?

Fantasy Time

Some would argue that this represents a policy failure but not our Isabel.

In other words, the ECB had succeeded in shifting the perceived lower bound on interest rates firmly into negative territory, supported by forward guidance that left the door open for the possibility of further rate cuts.

It is no great surprise that for Isabel it is all about “The Precious! The Precious!”

The ECB, for its part, tailored its non-standard measures to the structure of the euro area economy, where banks play a significant role in credit intermediation. In essence, this meant providing ample liquidity for a much longer period than under the ECB’s standard operations.

Yet even this has turned out to be something of a fantasy.

In spite of these positive effects on the effectiveness of monetary policy, the NIRP has often been criticised for its potential side effects, particularly on the banking sector……..In the extreme, the effect could be such that banks charge higher interest rates on their lending activities, thereby reversing the intended accommodative effect of monetary policy.

The text books which Professor Schabel has read and written contained nothing like this. We all know that if something is not in an Ivory Tower text book it cannot happen right?

Money Supply

This morning’s data showed a consequence of the Philosophy described above.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 13.5% in July from 12.6% in June.

This is the fastest rate of monetary expansion the Euro area has seen in absolute terms. There was a faster rate of expansion in percentage terms in its first month ( January 1999) of 14.7% but the numbers are so much larger now. Also contrary to so much official and media rhetoric cash is in demand as in July it totalled some 1.31 trillion Euros as opposed to 1.19 trillion a year before. This is out of the 9.78 trillion Euros.

As we try to analyse this there is the issue that it is simple with cash as 0% is attractive compared to -0.5% but then deposits should be fading due to the charge on them. Except we know that the major part of deposits do not have negative interest-rates because the banks are terrified of the potential consequences.

We can now switch to broad money and we are already expecting a rise due to the narrow money data.

The annual growth rate of the broad monetary aggregate M3 increased to 10.2% in July 2020 from 9.2% in June, averaging 9.5% in the three months up to July.

Below is the break down.

 

The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 13.5% in July from 12.6% in June. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 1.4% in July from 0.8% in June. The annual growth rate of marketable instruments (M3-M2) increased to 12.8% in July from 9.2% in June.

Putting it that way is somewhat misleading because the M1 change of 158 billion dwarfs the 33 billion of marketable instruments although the growth rates are not far apart.

 

Comment

Let me now put this into context in ordinary times we would expect the narrow money or M1 surge to start impacting about six months ahead. So it should begin towards the end of this year. Although it will be especially hard to interpret as some of the slow down was voluntary as in we chose to shut parts of the economy down. Has monetary policy ever responded to a voluntary slow down in this way before?

Also if we switch to broad money we see that the push has seen M3 pass the 14 trillion Euros barrier. Again in ordinary times we should see nominal GDP surge in response to that in around 2 years with the debate being the split between inflation and real growth. Except of course we do not know where either are right now! We have some clues via the surges in bond and equity markets seen but of course the Ivory Tpwers that Professor Schabel represents come equipped with blacked out windows for those areas.

Actually the good Professor and I can at least partly agree on something as I spotted this in her speech.

With the start of negative rates, we have observed a steady increase in the growth rate of loans extended by euro area monetary financial institutions.

They did although that does not mean the policies she supported caused this and in fact the growth rate of loans to the private-sector is now falling.

She somehow seems to have missed the numbers which further support my theme that her role is to make sure government borrowing is cheap ( in fact sometimes free or even for a profit) is in play.

The annual growth rate of credit to general government increased to 15.5% in July from 13.6% in June,

We now wait to see if the famous quote from Milton Friedman which is doing the rounds will be right one more time.

Inflation is just like alcoholism, in both cases when you start drinking or when you start printing to much money, the good effects come first the bad effects come later.

Or Neil Diamond.

Money talks
But it can’t sing and dance and it can’t walk

 

 

Germany sees quite a plunge in economic output or GDP

After last night’s rather damp squib from the US Federal Reserve ( they can expand QE within meetings) the Euro area takes center stage today. This is because the leader of its economic pack has brought us up to date on its economy.

WIESBADEN – The gross domestic product (GDP) in the 2nd quarter 2020 compared to the 1st quarter 2020 – adjusted by price, season and calendar – by 10.1%. This was the sharpest decline since the beginning of quarterly GDP calculations for Germany in 1970. It was even more pronounced than during the financial market and economic crisis (-4.7% in the first quarter of 2009).

So in broad terms we have seen a move double that of the credit crunch which was considered to be severe at the time.  The economy had also contracted in the first quarter of this year which we can pick up via the annual comparison.

Economic output also fell year-on-year: GDP in the second quarter of 2020 was 11.7% lower than in the previous year after adjustment for prices (including calendar adjusted). Here, too, there had not been such a sharp decline even in the years of the financial market and economic crisis of 2008/2009: the strongest decline to date was recorded in the second quarter of 2009 at -7.9% compared to the same quarter of the previous year.

So the worst annual comparison of the modern era although by not as large an amount.

We do not get an enormous amount of detail at this preliminary stage but there is some.

As the Federal Statistical Office (Destatis) further reports, both exports and imports of goods and services collapsed massively in the second quarter of 2020, as did private consumer spending and investments in equipment. The state, however, increased its consumer spending during the crisis.

Just like in the film Airplane they chose a bad time to do this…

Beginning with the second quarter of 2020, the Federal Statistical Office published GDP for the first time 30 days after the end of the quarter, around two weeks earlier than before. The fact that the results are more up-to-date requires more estimates than was the case after 45 days.

Although not a complete disaster as they would have been mostly guessing anyway. One matter of note is that 2015 was better than previously though and 2017 worse both by 0.3%. That is not good news for the ECB and the “Euro Boom” in response to its policies.

Unemployment

There has been bad but not unexpected news from the Federal Employment Agency as well this morning.

Unemployment rose by 2.0% compared to the previous month and by 27.9% year-on-year to 2.9 million. Underemployment without short-time work increased by 1.3% compared to the previous month and by 14.6% compared to the previous month. It is 3.7 million The unemployment rate is 6.3%, the underemployment rate is 7.9%.

Now things get a little more awkward as the statistics office has reported this also.

According to the results of the labor force survey, the number of unemployed was 1.97 million in June 2020. That was 39,000 people or 2.1% more than in the previous month of May. Compared to June 2019, the number of unemployed rose by 653,000 (+ 49.2%). The unemployment rate was 4.5% in June 2020.

What we are comparing is registered unemployment or if you prefer those receiving unemployment benefits with those officially counted as unemployed. Whilst we have a difference in timing ( July and then June) the gap is far wider than the change. The International Labour Organisation has some work to do I think…..

Being Paid To Borrow

Regular readers will be aware that this has essentially been the state of play in Germany for some time now. In terms of the benchmark ten-year yield this started in the spring of last year, but the five-year has been negative for nearly the last five years. That trend has recently been picking up again with the ten-year going below -0.5% this week. With the thirty-year at -0.12% then at whatever maturity Germany is paid to borrow,

This represents yet another defeat for the bond vigilantes because even Germany’s fiscal position will take a pounding from the economic decline combined with much higher public spending. But these days a weaker economy tends to lead to even lower bond yields due to expectations of more central bank buying of them.

ECB Monthly Bulletin

After the German numbers above we can only say yes to this.

While incoming economic data, particularly survey results, show initial signs of a recovery, they still point to a historic contraction in euro area output in the second quarter of 2020.

The problem is getting any sort of idea of how quickly things are picking back up. The ECB seems to be looking for clues.

Both the Economic Sentiment Indicator and the PMI display a broad-based rebound across both countries and economic sectors. This pick-up in economic activity is also confirmed by high-frequency indicators such as electricity consumption.

Meanwhile it continues to pump it all up.

The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion…………Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year……..The Governing Council will also continue to provide ample liquidity through its
refinancing operations. In particular, the latest operation in the third series of targeted
longer-term refinancing operations (TLTRO III) has registered a very high take-up of
funds, supporting bank lending to firms and households.

As to the last bit I can only say indeed! After all who would not want money given to you at -1%?

Comment

We now begin to have more of an idea about how much the economy of Germany has shrunk. Also this is not as some are presenting it because the economy changed gear in 2018 and the trade war of last year applied the brakes. Of course neither were on anything like the scale we have noted today. Whilst the numbers are only a broad brush they are a similar decline to Austria ( -10.7%) which gives things a little more credibility. Markets were a little caught out with both the Euro and the Dax falling as well as bond yields.

Looking ahead we can expect a bounce back in July but how much? The Markit PMI surveys seem to have lost their way as what does this mean?

The recovery in the German economy remained on
track in July, according to the latest ‘flash’ PMI® data
from IHS Markit

Which track?

“July’s PMI registered firmly in growth territory and
well above expectations, in a clear sign that
business conditions are improving across Germany
as activity and demand recover. Furthermore, for
an economy that is steered so much by exports, it
was encouraging to see manufacturers reporting a
notable upturn in sales abroad.”

I am not sure that anyone backing their views with actual trades are convinced by this. Of course things will have picked up as the lockdown ended but there will now be worries about this,

Germany records the highest number of new coronavirus cases in about six weeks ( Bloomberg)

So the recovery seems set to have ebbs and flows. Accordingly I have no idea how places can predict such strong bounce backs in economic activity in 2021 as we still are very unsure about 2020. I wish anyone ill with this virus a speedy recovery but I suspect that economies will take quite some time.

Money Supply Madness in the Euro area

This morning has brought a consequence of the actions of the European Central Bank into focus. In response to the Covid-19 pandemic it found itself out of interest-rate ammunition having already cut interest-rates to -0.6%. Or rather interest-rate ammunition for businesses and consumers as of course it has set a record low of -1% for The Precious! The Precious! So it found itself only able to employ more unconventional measures such as Quantitative Easing ( QE) and credit easing ( TLTROs). Of course it was already indulging in some QE which is looking ever more permanent along the lines such about by Joe Walsh.

I go to parties sometimes until four
It’s hard to leave when you can’t find the door

Money Supply

We have been observing the consequences of the above in this area for some months now. Today is no different.

Annual growth rate of narrower monetary aggregate M1,, comprising currency in circulation and overnight deposits, stood at 12.6% in June, compared with 12.5% in May.

If we look back we see that it was 7.2% a year ago and then the extra monetary easing of the autumn of 2019 saw it rally to around 8%. So the new measures have pretty quickly had an impact. That has not always been true as regular readers will know. Also whilst we have seen an annual rate of 13.1% in the past ( late 2009 when the credit crunch hit) the money supply is much larger now. Mostly of course due to all the official effort pushing it up!

In terms of totals M1 pushed past the 9.7 trillion Euros barrier in June and also cash in circulation pushed past 1.3 trillion. Cash is not growing as fast as the rest but in other terms an annual growth rate of 9.7% would be considered fast especially as it has been out of favour as a medium of exchange for obvious possible infection reasons. More woe for the media reporting of it.

Broad Money

As you can see this is on the surge too.

The annual growth rate of the broad monetary aggregate M3 increased to 9.2% in June 2020 from 8.9% in May, averaging 8.8% in the three months up to June. The components of M3, showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, stood at 12.6% in June, compared with 12.5% in May. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at 0.7% in June, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) increased to 10.1% in June from 5.7% in May.

The relative move has been even stronger here as the annual rate of growth on a year before has doubled from 4.6%. In more recent terms it has risen from around 5.5% if we ignore the odd print at the end of 2019. As to the breakdown much of the growth (8.5%) is M1 and it is noticeable that M2 seems very out  of fashion these days. I guess with interest-rates so low why have your money deposited for longer terms? But M3 growth has picked up noticeably.  We should not be surprised as that is one of the main targets of ECB policy both implicitly via corporate bond purchases and explicitly such as the purchase of commercial paper.

So we have more overnight deposits backed up by more cash and more money market fund shares. There was also a noticeable slowing in June to 95 billion Euros as the growth rate ( Taking us to 13.89 trillion)

There is another way of looking at this and as usual let me remind you not to take these numbers too literally. That went horribly wrong in my home country back in the day.

the annual growth rate of M3 in June 2020 can be broken down as follows: credit to the private sector contributed 5.1 percentage points (down from 5.3 percentage points in May), credit to general government contributed 5.0 percentage points (up from 3.6 percentage points), net external assets contributed 1.0 percentage point (as in the previous month), longer-term financial liabilities contributed 0.3 percentage point (up from 0.0 percentage point), and the remaining counterparts of M3 contributed -2.0 percentage points (down from -0.9 percentage point).

It was only a few days ago I pointed out that the main role of the ECB these days seems to have become to make sure the Euro area government’s can fund themselves cheaply.

Credit

I consider this to usually be a lagging indicator but there are some points of note and the credit to governments leaps off the page I think.

 The annual growth rate of credit to general government increased to 13.6% in June from 9.8% in May, while the annual growth rate of credit to the private sector stood at 4.8% in June, compared with 4.9% in May.

Credit to government was -2% as recently as February so the pedal has been pushed to the metal.

The ECB will be troubled by the latter part of the numbers below.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) decreased to 4.8% in June from 5.3% in May. Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.0% in June, unchanged from the previous month, while the annual growth rate of adjusted loans to non-financial corporations decreased to 7.1% in June from 7.3% in May.

Private-sector credit declined noticeably in the circumstances when adjusted but that seems to go missing in the detail. So let me help out.

New bank loans to euro area corporates slowed to €9bn in June, following a massive increase of €245bn over the previous three months. ( @fwred)

Putting it another way credit growth fell to 178 billion Euros in June of which 153 billion went to governments.

Comment

The response of the ECB to the Covid-19 pandemic has been to sing along with MARRS.

Brothers and sisters!
Pump up the volume
Pump that beat
Brothers and sisters!
Pump up the volume
We gonna get ya!

But just like their other moves of applying large interest-rate cuts and then negative bond yields it does not seem to be working. Back in the day I was taught this as “pushing on a string”. As a concept it is clear but in the intervening decades the monetary system has changed enormously. Personally I think the concepts of money and credit have merged in certain areas such as people paying for things with their phone. Another is the use of credit cards.

Putting it another way the economic impact is money supply multiplied by velocity with the catch being we do not know what velocity is. We can have a stab at what it was but right now we neither know what it is nor what it will be. So we know it has fallen over time undermining the central bank efforts making it push on a string but we can only say that looks like it is happening all over again, we cannot measure it with any precision.

Thus a likely consequence from this is inflation. We can see this in two ways. The official denials combined with increasingly desperate efforts to miss measure inflation. Or as the news overnight has highlighted and my subject of a few days ago, another high for the price of Gold.

Let me offer an olive branch to economics 101. How is the Euro rallying ( 1.17 versus the US Dollar). Well the US Money Supply is growing even faster.

Podcast

The role of the ECB is to finance Euro area governments rather than target inflation

Today opens with a Euro area summit. Although the summit is new the modus operandi is not.

There is also concern that most of the good news around any recovery is already baked in, as investors look towards this weekend’s EU leaders’ summit where there is some hope that some form of fudge can be achieved with respect to agreement over the €750bn recovery fund. ( CMC Markets )

Whether that is exactly the same sort of fudge we observed in the Greek crisis I am not sure but fudge does seem on the menu. Also in a manner that in the UK became associated with Gordon Brown the same thing keeps “coming around again” as Carly Simon would say.

This hope is tempered by the fact that the obstacles to an agreement remain high with 4-5 countries insistent that any grants be allocated with conditionality on the part of the countries receiving them. This is hardly unreasonable, but also suggests there will be no quick solution, with the probability that the can will get kicked down the road, as it always has done with these EU summits. ( CMC Markets )

This poses a question as the Euro fund was announced to a grand fanfare by President Von der Leyen. but it seems to have got stuck. This matters as we note that fiscal policy has been quite quickly deployed elsewhere during the Covid-19 pandemic. This is as awkward for the pronouncements of unity as something which was discussed in the comments section earlier this week.

Apple has been told it will not have to pay Ireland €13bn (£11.6bn) in back taxes after winning an appeal at the European Union’s second-highest court.

It overturns a 2016 ruling which found the tech giant had been given illegal tax breaks by Dublin.

The EU’s General Court said it had annulled that decision because there was not enough evidence to show Apple broke EU competition rules.

It is a blow for the European Commission, which brought the case. ( BBC News )

This exposes the issue over taxes where Ireland has in effect run as a tax haven within the Euro area for large corporates. The Netherlands does so in other ways which was exposed when Bono and U2 were found to be using it as a way of reducing the taxes they paid. There was a particular irony in an Irish band looking for lower taxes,although they did leave a clue.

But I still haven’t found
What I’m looking for
But I still haven’t found
What I’m looking for

The ECB

I did not do a build-up to yesterday’s policy meeting because the summer is in essence a “see you in six weeks” type of gig. I figured that was only going to be exacerbated by a President who openly reads from a crib sheet. Since the meeting there has been some matters of note. One is a type of signal of defeat.

ECB’S SCHNABEL: AS CLIMATE CHANGE POSES SEVERE RISKS TO PRICE STABILITY, CENTRAL BANKS ARE REQUIRED TO STRENGTHEN THEIR EFFORTS TO SUPPORT A MORE SUSTAINABLE ECONOMY. ( @FinancialJuice)

I do not know Isabel Schnabel so cannot say whether she is actually silly enough to believe what she says, or whether her recent appointment to the ECB Governing Board came with a tacit agreement she would too pretty much any party line? But the climate change diversion is plainly non-mandate and a clear diversion from the economic situation. That is grim as highlighted by this morning’s ECB survey.

The expectations of SPF respondents for euro area real GDP growth averaged -8.3%, 5.7% and 2.4% for 2020, 2021 and 2022, respectively.

So if we follow the advice of Maxine Nightingale

We gotta get right back to where we started from

We see that it will not be until 2023 under this forecast and in fact worse if we look further.

These represent revisions from the previous round of -2.8 percentage points for 2020 and +1.4 and +0.7 percentage points for 2021 and 2022

So this year is now worse than they thought so they have improved 2021 and 22 to make it look not quite so bad. They do manage some humour as the deeper economic decline will now apparently lead to less and not more unemployment and there is a laugh out loud moment too.

At 1.4%, average longer-term expectations for real GDP growth were unchanged.

Also as the main role of the ECB right now is to finance government’s this part of President Lagarde’s crib sheet was especially relevant.

Therefore – and we don’t see it for the moment, frankly – but unless there were significant upside surprises, our baseline remains that we will use the entire envelope of the PEPP.

Just as a reminder as there are many policies in play.

We will continue our purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion.

However we quickly learned that the programme by President Lagarde to get everyone to sing from the same hymn sheet ( remember the picture of a rather grand dining table…) is having her usual success.

ECB policy makers didn’t agree on whether they expect to use the full amount of their 1.35 trillion-euro bond program, despite Lagarde subsequently saying that’s likely, sources say ( Bloomberg)

Italy

The ECB “sauces” issue has a conceptual element especially right now and to my mind we can highlight this by looking at the girlfriend in a coma.

Italy national debt at a new all time high +85,939 billion euro YOY to 2,5 trillion euro! That’s 152,9% to GDP. Thanks to the euro experiment pays record low interest on 10 year bonds . This whole system is so bankrupt or like Italians say: banca rotta

I like the phrase “banca rotta” and will be using it in future. But as we mull the upwards trajectory of the national debt which is almost as fast as economic output is dropping there is the role of the ECB in this. Due to its QE bond purchases Italy pays a mere 1.25% on its benchmark ten-year yield.

That is remarkable in several respects. Firstly it went above 7% in the Euro area crisis as opposed to 3% this time around. Yet pretty much everything is worse now. The pandemic has dropped absolute output levels to new lows but even worse we know that Italy struggles to grow at all and maybe makes 1% per annum on a sustained basis. The National Debt has consequently risen as the Euro area authorities desperately try to redact all mentions of the 120% to GDP level they established in the Greek crisis.

So the ECB has to keep buying Italy’s debt or as Coldplay put it.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble

Comment

The ECB campaign to present itself as green champions seems to have fallen at the first hurdle.

And Fourth, ECB officials can be mindful of the environment when conducting work business. In Jan the Press Conference talked environment and then all GC members flew immediately to Davos (which is accessible by train.) Greening the portfolio is not enough. ( @GeneralTheorist)

Perhaps they are too important for such niceities in the same manner that President Lagarde was too important to go to jail when she was found guilty of negligence in a fraud case.

As to the day job then the role of the ECB is basically to finance government spending. After all the rhetoric of the previous Governor Jean-Clause Trichet that the inflation target has been hit ( 1.97%) has been replaced by an average of 0.7%. Maybe negative interest-rates and QE  takes you further away from it and not nearer to it, especially when you make sure that the asset prices that do rise are kept out of the inflation measure.

More generally there are deeper issues here. The conceptual one is worldwide and has been the subject of my work on here which you could summarise as where is the exit strategy? As we keep diving deeper. These are made worse in the Euro area as whilst there are weaknesses for example in the US the Federal structure was able to act quickly whereas the Euro area is still debating.

But as it is Friday let me offer you a Matrix style blue pill from this morning’s ECB working paper.

First, we find that the ECB responded to risks to price stability in line with its primary objective, and that the
account of post-meeting communications about risks to price stability and to growth significantly
enhances the modelling of its reaction function.

Although there is also this.

Good Morning from #Italy where Italian Euro is 30% overvalued vs German Euro when measured by Nutella purchasing power parity (Price for almost homogeneous product Nutella): The 750g jar costs about €7.50 per kg in Italy vs €5.20/kg in Germany. ( @Schuldensuehner )

The ECB is creating Euros even faster than Wirecard can lose them

The focus shifts today to the Euro area as there has been action on a number of fronts. Firstly the world’s second most notable orange person has been speaking at the online Northern Lights Summit. The Orangina Christine Lagarde seems to have upset the folk at ForexLive already.

Lagarde reaffirms that government debt will eventually have to be repaid

No. Just no. Governments will never run surpluses just with a snap of a finger and what is happening to the world and their debt levels now is basically what we have seen with Japan over the past two decades.

Actually before the pandemic Germany was running surpluses but the majority were not. We also got some classic Christine Lagarde as she waffled.

FRANKFURT (Reuters) – The euro zone is “probably past” the worst of the economic crisis caused by the coronavirus pandemic, European Central Bank President Christine Lagarde said on Friday, while urging authorities to prepare for a possible second wave.

“We probably are past the lowest point and I say that with some trepidation because of course there could be a severe second wave,” Lagarde told an online event.

At least she is not declaring success as Greeks and Argentinians have learnt to be terrified of what happens next after painful experience.

Also there has been this.

FRANKFURT (Reuters) – It is better for the European Central Bank to be safe than sorry when it decides whether to withdraw aggressive stimulus measures deployed to combat the fallout from the coronavirus pandemic, ECB policymaker Olli Rehn said on Friday.

“It’s better to be safe than sorry,” Rehn said. “Recall the premature rate hikes of 2011 during the euro crisis.”

This is a classic strategy where a policymaker suggests things may be reduced (yesterday) and today we have the good cop part of this simple Good Cop,Bad Cop pantomime.

Money Supply

Back on the 29th of May I pointed out that the blue touch paper had been lit on the  money supply boom of 2020. Well the rocket is lifting off.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 12.5% in May from 11.9% in April.

That compares with the recent nadir of an annual rate of 6.2% in January of 2019. Another comparison is that the rate of annual growth was around 8% before the latest phase of monetary action such as the extra Quantitative Easing of the PEPP. The weekly reporting does not exactly match a month but we saw an extra 116 billion Euros in May from it.

You will not be surprised to learn that the surge above pushed broad money growth higher as well.

Annual growth rate of broad monetary aggregate M3, increased to 8.9% in May 2020 from 8.2% in April (revised from 8.3%).

Indeed it is mostly a narrow money thing.

Looking at the components’ contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 8.4 percentage points (up from 8.0 percentage points in April), short-term deposits other than overnight deposits (M2-M1) contributed 0.2 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.3 percentage point (as in the previous month).

The pattern here is not quite the same as whilst the January 2019 reading at 3.8% was low the nadir is 3.5% in August of 2018. That provides some food for thought because if you apply the expected response to this the Euro area economy should have been slowing further about now. Of course the pandemic has created such a fog we cannot see one way or another about whether that held true.

There is another way of analysing this and here is a balance sheet style view.

credit to the private sector contributed 5.3 percentage points (up from 4.8 percentage points in April), credit to general government contributed 3.6 percentage points (up from 2.3 percentage points), net external assets contributed 1.0 percentage point (down from 1.4 percentage points), longer-term financial liabilities contributed 0.0 percentage point (as in the previous month), and the remaining counterparts of M3 contributed -0.9 percentage point (down from -0.3 percentage point).

I counsel caution about reading too much into this as back in the day such analysis when spectacularly wrong in the UK. Accounting identities are all very well but they miss the human component as well as some of the actual numbers. But we see growth from the government sector and the private-sector here. Also the external component has faded a bit in relative terms which provides a counterpoint to another piece of news.

Grandstanding?

From yesterday when all our troubles apparently not so far away.

Eurosystem repo facility for central banks (EUREP) introduced as precautionary backstop to address pandemic-related euro liquidity needs outside euro area….EUREP to allow broad set of central banks to borrow euro against euro-denominated debt issued by euro area central governments and supranational institutions….New facility to be available until June 2021.

These things are invariably badged as temporary but last time I checked the “temporary” income tax in the UK to pay for the Napoleonic War is still here. But as to what good it might do in a world where nobody seems to actually want Euros in this manner I am not sure. Perhaps it is a protection against another outbreak of the “Carry Trade” as this bit hints.

The provision of euro liquidity to non-euro area central banks aims at alleviating euro liquidity needs in the respective countries in a stressed market environment. The
potential beneficiaries are banks that need euro funding and are not able to obtain such funding in the market or get it only at prohibitive prices.

Although there is no real link at all to this.

Overall, these arrangements aim to facilitate a smooth transmission of monetary policy in the euro
area to the benefit of all euro area citizens

Let me help out bu suggesting replacing “all euro area citizens” with “The Precious! The Precious!”.

Here is what is presumably the official view from former ECB Vice-President Vitor Constancio. You may recall that Vitor’s job was to respond with technical questions at the ECB presser with a long involved answer that would send everyone to sleep. But at least he had a role unlike his replacement.

The ECB, reflecting awareness about the international role of the euro, just announced a new repo facility for other central banks to get euros against collateral.The FED dit it recently ..In general, the EU is finally aware of its geo-political interests.

The Fed saw demand of over US $400 billion at the peak whereas I suspect the Euro interest may be more like 0. Maybe someone will request a million or two as a test?

Comment

The relevance of the money supply changes is as follows. Narrow money supply impacts in the next 6 months and broad money in around two years. So assuming there is no Covid-19 second wave the push will impact as economies are picking up anyway. That is awkward as there is a clear inflation danger from this. There are signs of it already as we see the oil price pick up which even the neutered official inflation numbers will record. They of course miss the bit described by Abba.

Money, money, money
Must be funny
In the rich man’s world
Money, money, money
Always sunny
In the rich man’s world

Although we do see evidence of a type of money destruction.

Germany’s Wirecard collapsed on Thursday owing creditors almost $4 billion. ( Reuters )

The regulators are now on the case but.

All the money’s gone, nowhere to go ( The Beatles )

The ECB bails out the banks yet again, the Euro area economy not so much

One of the battles in economics is between getting data which is timely and it being accurate and reliable. Actually we struggle with the latter points full stop but especially if we try to produce numbers quickly. As regular readers will be aware we have been observing this problem in relation to the Markit Purchasing Manager Indices for several years now. They produce numbers which if this was a London gangster movie would be called “sharpish” but have missed the target on more than a few occasions and in he case of the Irish pharmaceutical cliff their arrow not only missed the target but the whole field as well.

Things start well as we note this.

The eurozone economic downturn eased markedly
for a second successive month in June as
lockdowns to prevent the spread of the coronavirus
disease 2019 (COVID-19) outbreak were further
relaxed, according to provisional PMI® survey data.
The month also saw a continued strong
improvement in business expectations for the year
ahead.

As it is from the 12th to the 22nd of this month it is timely as well but then things go rather wrong.

The flash IHS Markit Eurozone Composite PMI rose
further from an all-time low of 13.6 seen back in
April, surging to 47.5 in June from 31.9 in May. The
15.6-point rise was by far the largest in the survey
history with the exception of May’s record increase.
The latest gain took the PMI to its highest since
February, though still indicated an overall decline in
business output.

Actually these numbers if we note the Financial Times wrong-footed more than a few it would appear.

The rise in the eurozone flash Composite PMI in June confirms that economic output in the region is recovering rapidly from April’s nadir as restrictions are progressively eased. ( Capital Economics )

Today’s PMI numbers provide further evidence of what initially looks like a textbook V-shaped recovery. As much as more than a month of (full) lockdowns had sent economies into a standstill, the gradual reopenings of the last two months have led to a sharp rebound in activity. ( ING Di-Ba)

The latter is an extraordinary effort as a number below 50 indicates a further contraction albeit with a number of 47.5 a minor one. So we have gone enormous contraction , what would have been called an enormous contraction if they one before had not taken place and now a minor one. But the number now has to be over 50 as the economy picks up and this below is not true.

Output fell again in both manufacturing and
services, the latter showing the slightly steeper rate
of decline

On a monthly basis output rose as it probably did at the end of last month, it is just that it is doing so after a large fall. The one number which was positive was still way too low.

Flash France Composite Output Index) at 51.3
in June (32.1 in May), four-month high.

For what it is worth the overall view is as follows.

We therefore continue to expect GDP to slump by over 8% in 2020 and, while the recovery may start in the third quarter, momentum could soon fade meaning it will likely
take up to three years before the eurozone regains
its pre-pandemic level of GDP.

Actual Data

From Statistics Netherlands.

In May 2020, prices of owner-occupied dwellings (excluding new constructions) were on average 7.7 percent up on the same month last year. This price increase is higher than in the previous months.

Well that will cheer the European Central Bank or ECB. Indeed ECB President Lagarde may have a glass of champagne in response to this.

 In May 2020, house prices reached the highest level ever. Compared to the low in June 2013, house prices were up by 47.8 percent on average in that month.

Staying with the Netherlands and switching to the real economy we see this.

According to figures released by Statistics Netherlands (CBS), in April 2020 consumers spent 17.4 percent less than in April 2019. This is by far the largest contraction in domestic household consumption which has ever been recorded by CBS. Consumers mainly spent less on services, durable goods and motor fuels; on the other hand, they spent more on food, beverages and tobacco.

If we try to bring that up to date we see that if sentiment is any guide things have improved but are still weak.

At -27, the consumer confidence indicator in June stands far below its long-term average over the past two decades (-5). The indicator reached an all-time high (36) in January 2000 and an all-time low (-41) in March 2013.

Moving south to France we were told this earlier today.

In June 2020, the business climate has recovered very clearly, in connection with the acceleration of the lockdown exit. The indicator that synthesizes it, calculated from the responses of business managers from the main market sectors, has gained 18 points, its largest monthly increase since the start of the series (1980).

The jump is good news for the French economy although the rhetoric above does not match the detail.

At 78, the business climate has exceeded the low point reached in March 2009 (70), but remains far below its long-term average (100).

The situation is even worse for employment.

At 66, the employment climate still remains far below its May 2009 low (73), and, a fortiori, its long-term average (100).

Oh and staying with France I know some of you like to note these numbers.

At the end of Q1 2020, Maastricht’s debt reached €2,438.5 billion, a €58.4 billion increase in comparison to Q4 2019. It accounted for 101.2% of gross domestic product (GDP), 3.1 points higher than last quarter, the highest increase since Q2 2019.

Just as a reminder the UK measuring rod is different and tends to be around 4% of GDP lower. But of course both measures will be rising quickly in both France and the UK.

Comment

Let me now switch to a speech given earlier today by Philip Lane of the ECB.

 Euro area output contracted by a record 3.6 percent in the first quarter of the year and is projected to decline by a further 13 percent in the second quarter. While growth will partially rebound in the second half of this year, output is projected to return to the level prevailing at the end of 2019 only at the end of 2022.

In fact all of that is open to doubt as the first quarter numbers will be revised over time and as discussed above we do not know where we are right now. The forecasts are not realistic but manufactured to make other criteria such as the debt metrics look better than otherwise.

Also there is a real problem with the rhetoric below which is the cause of the policy change which was the Euro area economy slowing.

Thanks to the recalibration of our monetary policy measures announced in September 2019 – namely the cut in our deposit facility rate, enhanced forward guidance, the resumption of net asset purchases under the asset purchase programme (APP) and the easing of TLTRO III pricing – sizeable monetary accommodation was already in place when Europe was confronted with the COVID-19 shock.

As that was before this phase he is trying to hide the problem of having a gun from which nearly all the bullets have been fired. If we cut through the waffle what we are seeing are yet more banking subsidies.

The TLTRO programme complements our asset purchases and negative interest rate policy by ensuring the smooth transmission of the monetary policy stance through banks.

How much well here was @fwred last week.

ECB’s TLTRO-III.4 : €1308bn The Largest Longer Term Refinancing Operation ever………Banks look set to benefit, big time. All TLTRO-III will have an interest rate as low as -1% between Jun-20 and Jun-21, resulting in a gross transfer to banks of around €15bn. Most banks should qualify. Add tiering and here you are: from NIRP to a net transfer to banks!

So the banks get what they want which is interest-rate cuts to boost amongst other things their mortgage books which is going rather well in the Netherlands. Then when they overdose on negative interest-rates they are bailed out, unlike consumers and businesses. Another sign we live in a bankocracy.

Apparently the economy will win though says the judge,jury and er the defence and witness rather like in Blackadder.

An illustrative counterfactual exercise by ECB staff suggests that the TLTRO support in removing tail risk would be in the order of three percentage points of euro area real GDP growth in cumulative terms over 2020-22.

Austria

I nearly forgot to add that Austria is issuing another century bond today and yes I do mean 100 years. Even more extraordinary is that the yield looks set to be around 0.9%.

The Investing Channel