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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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)

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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.

 

 

Germany will be the bellweather for the next stage of ECB monetary easing

Today there only is one topic and it was given a lead in late last night from Japan. There GDP growth was announced as 0.3% for the last quarter of 2018 which sounded okay on its own but meant that the economy shrank by 0.4% in the second half of 2018. Also it meant that it was the same size as a year before. So a bad omen for the economic growth news awaited from Germany.

In the fourth quarter of 2018, the gross domestic product (GDP) remained nearly at the previous quarter’s level after adjustment for price, seasonal and calendar variations.

If you want some real precision Claus Vistensen has given it a go.

German GDP up a dizzying 0.0173% in Q4.

Of course the numbers are nothing like that accurate and Germany now faces a situation where its economy shrank by 0.2% in the second half of 2018. The full year is described below.

Hence short-term economic development in Germany showed two trends in 2018. The Federal Statistical Office (Destatis) reports that, after a dynamic start into the first half of the year (+0.4% in the first quarter, +0.5% in the second quarter), a small dip (-0.2% in the third quarter, 0.0% in the fourth quarter) was recorded in the second half of the year. For the whole year of 2018, this was an increase of 1.4% (calendar adjusted: 1.5%). Hence growth was slightly smaller than reported in January.

Another way of looking at the slowdown is to compare the average annual rate of growth in 2018 of 1.5% with it now.

+0.6% on the same quarter a year earlier (price and calendar adjusted)

If we look at the quarter just gone in detail we see that it was domestic demand that stopped the situation being even worse.

The quarter-on-quarter comparison (price, seasonally and calendar adjusted) reveals that positive contributions mainly came from domestic demand. Gross fixed capital formation, especially in construction but also in machinery and equipment, increased markedly compared with the third quarter of 2018. While household final consumption expenditure increased slightly, general government final consumption expenditure was markedly up at the end of the year.

Is the pick up in government spending another recessionary signal? So far there is no clear sign of any rise in unemployment that is not normal for the time of year.

the number of persons in employment fell by 146,000, or 0.3%, in December 2018 on the previous month. The month-on-month decrease was smaller than the relevant average of the past five years (-158,000 people.

Actually we can say that it looks like there has been a fall in productivity as the year on year annual GDP growth rate of 0.6% compares with this.

Number of persons in employment in the fourth quarter of 2018 up 1.1% on the fourth quarter of 2017.

Also German industry does not seem to have lost confidence as we note the rise in investment which is the opposite of the UK where it ha been struggling. But something that traditionally helps the German economy did not.

However, development of foreign trade did not make a positive contribution to growth in the fourth quarter. According to provisional calculations, exports and imports of goods and services increased nearly at the same rate in the quarter-on-quarter comparison.

In a world sense that is not so bad news as the German trade surplus is something which is a global imbalance but for Germany right now it is a problem for economic growth.

So let us move on as we note that German economic growth peaked at 2.8% in the autumn of 2017 and is now 0.6%.

Inflation

This morning’s release on this front does not doubt have an element of new year sales but seems to suggest that inflation has faded.

 the selling prices in wholesale trade increased by 1.1% in January 2019 from the corresponding month of the preceding year. In December 2018 and in November 2018 the annual rates of change had been +2.5% and +3.5%, respectively.
From December 2018 to January 2019 the index fell by 0.7%.

Bond Yields

It is worth reminding ourselves how low the German ten-year yield is at 0.11%. That according to my chart compares to 0.77% a year ago and is certainly not what you might expect from reading either mainstream economics and media thoughts. That is because the German bond market has boomed as the ECB central bank reduced and then ended its monthly purchases of German government bonds. Let me give you some thoughts on why this is so.

  1. Those who invest their money have seen a German economic slowing and moved into bonds.
  2. Whilst monthly QE ended there are still ECB holdings of 517 billion Euros which is a tidy sum especially when you note Germany not expanding its debt and is running a fiscal surplus.
  3. The likelihood of a new ECB QE programme ( please see Tuesday’s post) has been rising and rising. Frankly the only reason it has not been restarted is the embarrassment of doing so after only just ending it.

Accordingly it would not take much more for the benchmark ten-year yield to go negative again. After all all yields out to the nine-year maturity now are. Let me point out how extraordinary that is on two counts. First that it happened at all and next the length of time for which negative bond yields have persisted.

If we look at that from another perspective we see that Germany could if it so chose respond to this slowing with fiscal policy. It can borrow for essentially nothing and in both absolute and relative terms its national debt has been falling. The awkward part is presentational after many years of telling other euro area countries ( most recently Italy) that this is a bad idea!

Comment

If you are a subscriber to the theme that Euro area monetary policy has generally been set for Germany’s benefit then there is plenty of food for thought in the above. Indeed it all started with the large devaluation it engineered for its exporters via swapping the Deutschmark for the Euro. That is currently very valuable because a mere glance at Switzerland suggests that rather than 1.13 to the US Dollar  the DM would be say 1.50 and maybe higher. Care is needed because as the Euro area’s largest economy of course it should be a major factor in monetary policy just not the only one.

Right now there will be chuntering of teeth in Frankfurt on two counts. Firstly that my theme that the timing of what you do matters nearly as much as what you do and on this front the ECB has got it wrong. Next comes the issue that it was not supposed to be the German economy that was to be a QE junkie. Yes the trade issues have not helped but it is deeper than that.

With some of the banks in trouble too such as Deutsche Bank and Commerzbank we could see a “surprise” easing from the ECB especially if there is a no-deal Brexit. That would provide a smokescreen for a fast U-Turn.

Me on The Investing Channel

The NordLB crisis and the problems of the German banks

Today what we are going to be taking the advice of the Jam and Going Underground. Specifically we are looking into the problems and travails of the German banking system. One factor in this is the deteriorating economic situation which the German IFO has kindly elaborated on this morning.

As you can see according to them the German economy has gone from strong boom to slight down swing and is now moving into down swing. That will not be good for the banking environment. Some wry humour can be provided by the comparison with Italy as a 0.1% fall for it put it in “deep recession” in the third quarter of last year but a 0.2% decline for Germany apparently only put it in a “slight down swing”! Also surely the French strong boom was in 2017 rather than last year, but we get the picture that generally there has been not only a slowing but an expectation of harder economic times across the Euro area which will affect international banking.

Landesbanken

The Frankfurt Rundschau looked at things back on the 24th of May last year.

Most of the Landesbanks belong to the federal states and savings banks associations, with the exception of Landesbank Berlin, which is the sole property of the savings banks.

The ownership structure is complicated by they are mainly owned by German states and cities. Also the credit crunch ending up crunching some of them.

Before the financial crisis, there were still eleven central institutes of the savings banks and the central savings bank fund provider Deka in Frankfurt. In the meantime there are only seven – after the privatization of HSH Nordbank six – and the Deka.

Even back then one of them was in particular trouble.

The capital base of Nord LB is rather modest. CEO Thomas Bürkle therefore stated in April that the bank and its owners – the states of Lower Saxony and Saxony-Anhalt as well as three savings banks associations – were examining “various options” in order to get fresh money. This includes the inclusion of a private investor. For if the state owners inject capital, that would be an aid case and would call the European Commission on the plan.

I do not know if they meant outright modest or in comparison to the troubled loan book but we do know the situation was already worrying enough that a road to Damascus style move as in accepting private capital was looking likely.

So we move on with a reminder that whilst there were hopes that ownership structures might influence banking behaviour. But just like the hopes for the mutuals were dashed in the UK the state backed Landesbanken continue to be trouble.

NordLB

The particular case of Nord LB has gone from bad to worse in 2019. On January 3rd the Financial Times reported that a regular establishment gambit had come something of a cropper.

Frankfurt-based public lender Helaba has terminated merger talks with stricken state-owned rival NordLB, reducing the possibility of a public sector rescue of the Hanover-based lender that aims to raise €3.5bn in additional capital………A merger between Helaba and NordLB would have created a lender with about €320bn of assets and could have been a first step towards a wider consolidation of Germany’s Landesbanken — the regional lenders co-owned by federal states and local savings banks.

So as my late father would have put it, that would have muddied the accountancy picture for a couple of years. As to what they would have been trying to cover up and hide?

With €155bn in assets, Hanover-based NordLB is the fourth-largest German Landesbank and was singled out as the weakest link in Germany’s banking system in the European Banking Authority’s stress test in November. Its balance sheet is creaking under €7.3bn in toxic shipping loans.

The reminds us of how we got here which was via some disastrous lending to the shipping sector and also a reminder of the size of NordLB. This is a problem for the local area.

The state of Lower Saxony, which holds a 59 per cent stake in NordLB, is negotiating with three different private equity investors — including Cerberus and Apollo — over minority investments that would also include the state authority putting more money into the bank.

Apparently it is always just about to turn a corner, which is a familiar theme.

“I am confident that we will find a solution in January,” Lower Saxony’s finance minister Reinhold Hilbers said in a statement on Thursday. His initial plan was to fix the issue by the end of 2018.

Oh and whilst we are thinking in terms of groundhog days, the bits which aren’t losing money are always okay.

A person close to the bank stressed that all of NordLB’s units besides shipping finance are profitable,

What has happened now?

As ever big developments often happen at a weekend and the one just passed was one of those. From the Shipping Tribune.

Germany’s NordLB will be bailed out by public-sector savings banks and the state of Lower Saxony at a cost of as much as 3.7 billion euros ($4.2 billion), thwarting a bid by Cerberus Capital Management and Centerbridge Partners for a stake in the struggling lender.

The restructuring package, which Lower Saxony Premier Stephan Weil called “the best of all possible options,” involves as much as 1.2 billion euros from the savings banks group and up to 1.5 billion euros in capital from Lower Saxony. An additional contribution from the state — NordLB’s main shareholder — could add another 1 billion euros.

In this situations “could add” is invariably a done deal as the news is doled out in bite-sized chunks. As to the significance of this Johannes Borgen is on the case on Twitter.

That’s obviously state resources, but is it state aid ?

He sums up the case for it being state aid here.

Arguing for state aid is the fact that they are owned by the Lander, the cities etc. So fully public owned and this has been the case forever. It’s easy to argue that they serve a public policy goal.

But that is awkward for the German and Euro area establishments for this reason.

I honestly don’t know where this will end. But if the Sparkassen end up being consider public entities for state aid rules, it’s an enormous pack of worm because every single loan they grant could be considered state aid!

Thus there will be a large effort to avoid this is in the way that the ECB calls itself a “rules-based organisation” as it indulges in monetary policies which suggest it instead does “Whatever it takes”.

A possible route is to argue that this has taken place on market terms. That is not really true because the state has offered better terms than the two US hedge-fund alternatives but if we return to the Shipping Tribune maybe the effort has already begun.

The deal with the savings banks will, over time, cost the state less than if NordLB had accepted the offer from the private equity companies, said Reinhold Hilbers, the finance minister of Lower Saxony and head of the company’s supervisory board.

That is a familiar political strategy as by the time we catch up with this particular kicked can we my well have forgotten about this statement and its forecasts and anyway Herr Hilbers will probably have moved on. Oh and it is an implicit admittal that it is costing the state more now.

Comment

We see today that there is far more to the current German banking crisis than the decline or Deutsche Bank or to that matter Commerzbank. Also there are more similarities with the troubles in Italy than many would like to admit. But as we observe this from @macroymercados we are left wondering how the NordLB accounts have been approved for the last decade?

– Agreed to sell loans to Cerberus Capital Management, according to a person familiar with the transaction, while the German lender expects a loss of about €2.7b for 2018.

If we move to the states involved then the figures quoted today will be a minimum for their involvement but that may take some time to be revealed as the proposed cash injection will oil the wheels for some time.

As to whether this will turn out to be a bailout or bail-in only time will tell? This looks like a bailout thus breaking the spirit at least of EU banking rules but we will have to see. We could see some wild swings in the price of Nord LB bonds. As to Germany as a whole even if this gets added to the national debt then there is a clear difference with Italy as it has a 0.17% ten-year bond yield and has reduced its gross national debt by around 52 billion Euros over the past year. Real trouble there would need involvement in Deutsche Bank.

 

 

 

When will the ECB ease monetary policy again?

Sometimes life catches up with you really fast and we have seen another example of this in the last 24 hours, so let;s get straight to it.

Analysts at Deutsche Bank say European Central Bank’s Mario Draghi indicated the possibility of a one-off interest rate hike at his last press conference. With his next appearance due on Thursday, the president may choose to feed or quell that speculation. ( Bloomberg)

I found this so extraordinary that I suggested on social media that Deutsche Bank may have a bad interest-rate position it wants to get rid of. After all at the last press conference we were told this and the emphasis is mine.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

Now Forward Guidance by central banks is regularly wrong but it is invariably due to a cut in interest-rates after promising a rise rather than an actual rise. The latter seems restricted to currency collapses. So let us move onto the economic situation which has been heading south for a while now as the declining money supply data we have been tracking has been followed by a weakening economic situation.

France

This morning brought more worrying news from the economy of France from the Markit PMI business survey. It started well with the manufacturing PMI rising to 51.2 but then there was this.

Flash France Services Activity Index at 47.5 in January (49.0 in December), 59-month low.

So firmly in contraction territory as we look for more detail.

Private sector firms in France reported a further
contraction in output during the opening month of
2019. The latest decline was the fastest for over four
years, even quicker than the fall in protest-hit
December. The strong service sector that had
supported a weak manufacturing sector in the
second half 2018 declined at a faster rate in January.
Meanwhile, manufacturers recovered to register
broadly-unchanged production.

These numbers added to the official survey released only yesterday.

In January 2019, the balances of industrialists’ opinion on overall and foreign demand in the last three months have recovered above their long-term average – they had significantly dropped over the past year.

They record a manufacturing bounce too, but the general direction of travel is the same as the number for foreign demand has fallen from 21.8 at the opening of 2018 to 3.6 now and the number for global demand has fallen from 21.7 to 1.0 over the same timescale.

Perhaps we get an idea of a possible drop from wholesale trade.

The composite indicator has fallen back by five points compared to November 2018. At 99, it has fallen below its long-term average (100) for the first time since January 2017.

But in spite of a small nudge higher in services the total picture for France looks rather poor as we note that it looks as though it saw a contraction in December and that may well have got worse this month.

Germany

There was little solace to be found in the Euro area’s largest economy.

“The Germany PMI broke its recent run of
successive falls in January thanks to a stronger
increase in service sector business activity, but the
growth performance signalled by the index was still
one of the worst over the past four years.
“Worryingly for the outlook, the recent soft patch in
demand continued into the New Year.”

So some growth but not very much and I note Markit are nervous about this as they do not offer a suggestion of what level of GDP ( Gross Domestic Product) grow is likely from this. This of course adds to the flatlining we seem to have seen for the second half of 2018 as around 0.2% growth in the fourth quarter merely offset the 0.2% contraction seen in the third quarter.

Also the recovery promised by some for the manufacturing sector does not seem to have materialised.

Manufacturing fell into contraction in January as
the sector’s order book situation continued to
worsen, showing the steepest decline in incoming
new work since 2012.

The driving force was this.

Weakness in the auto industry was once again widely reported, as was a slowdown in demand from China.

Euro area

The central message here followed that of the two biggest Euro area economies we have already looked at. The decline in the composite PMI suggests on ongoing quarterly GDP growth rate of 0.1%. Added to it was the suggestion that the future is a lot less than bright.

New orders for goods fell for a fourth successive
month, declining at a rate not seen since April
2013, while inflows of new business in the service
sector slipped into decline for the first time since
July 2013

Inflation

The target is just below 2% as an annual rate so we note this.

The euro area annual inflation rate was 1.6% in December 2018, down from 1.9% in November

Of course being central bankers they apparently need neither food nor energy so they like to focus on the inflation number without them which is either 1.1% or 1% depending exactly which bits you omit, But as you can see this is hardly the bedrock for an interest-rate rise which is reinforced by this from @fwred of Bank Pictet.

More bad news for the ECB. Our PMI price pressure gauge fell by the largest amount since mid-2011, to levels consistent with monetary easing along with activity indicators.

Comment

The situation has become increasingly awkward for Mario Draghi and the ECB as a slowing economy and lower inflation have been described by them as follows.

When you look at the economy, well, you still see the drivers of this recovery are still in place. Consumption continues to grow, basically supported by the increase in real disposable income, which, if I am not mistaken, is at the historical high since six years or something, and households’ wealth. Business investments continue to grow, residential investment, as I said in the IS [introductory statement] is robust. External demand has gone down but still grows.

Yet as we can see the reality is that economic growth looks like it has dropped from the around 0.7% of 2017 to more like 0.1% now. If we were not where we are with a deposit rate of -0.4% and monthly QE having only just ended they would be openly looking at an interest-rate cut or more QE.

Whilst we have been observing the slow down in the M1 money supply from just under 10% to 6.7% the ECB has lost itself in a world of “ongoing broad-based expansion”. It is not impossible we will see some liquidity easing today via a new TLTRO which would also help the Italian banks but we will have to see.

As to why there has been talk about an interest-rate rise well it is not for savers it is for the precious and the emphasis is mine.

As a result, reductions in
rates can end up having a similar effect as a flattening of the yield curve, as banks interest
revenue drops along with rates, but interest costs only adjust partially because of the zero
lower bound on retail deposits. In this situation, lowering rates below zero can pose a
threat to banks’ profitability. ( ECB November 2018)

Now we can’t have that can we?

Me on The Investing Channel