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

 

 

 

 

Even if this quarter sees economic growth of 7% Germany has gone back in time to 2015

Today has brought the economic engine of the Euro ares into focus as we digest a barrage of data from and about Germany. We find that the second effort at producing economic output figures for the second quarter has produced a small improvement.

WIESBADEN – The gross domestic product (GDP) fell sharply by 9.7% in the 2nd quarter of 2020 on the 1st quarter of 2020 after adjustment for price, seasonal and calendar variations. According to the Federal Statistical Office (Destatis), the GDP drop in the 2nd quarter of 2020 was not quite as steep as reported in the first release of 30 July 2020 (-10.1%).

This means that the comparison with last year improved as well.

11.3% on the same quarter a year earlier (price-adjusted)

The last figure is revealing in that it reminds us that the German economy had been in something of a go-slow even before the Covid-19 pandemic hit. Also we note that the hit was in broad terms double that of the credit crunch.

The slump in the German economy was thus much larger than during the financial and economic crisis of 2008/2009 (-4.7% in the 1st quarter of 2009) and the sharpest decline since quarterly GDP calculations for Germany started in 1970.

The Details

With a lockdown in place for a fair bit of the quarter this was hardly a surprise.

As a consequence of the ongoing corona pandemic and the restrictions related with it, household final consumption expenditure fell sharply by 10.9% in the 2nd quarter of 2020.

What is normally considered to be a German strength fell off the edge of a cliff as investment plunged.

Gross fixed capital formation in machinery and equipment even dropped by as much as 19.6%.

Which made the annual picture this.

 Gross fixed capital formation in machinery and equipment fell sharply by 27.9% after already dropped considerably by 9.5% in the 1st quarter.

Also a platoon of PhD’s from the ECB will be on their way to work out what has gone on here?

Gross fixed capital formation in construction also declined markedly (-4.2%) in the 2nd quarter, which was due in particular to the exceptionally strong 1st quarter (+5.1%).

The ECB PhD’s may be able to write a working paper describing what their bosses would consider a triumph. Or at least, something described as a triumph on the crib sheet provided to ECB President Christine Lagarde.

Gross fixed capital formation in construction, which was 1.4% higher than in the 2nd quarter of 2019, also had a supporting effect year on year.

Looking at the annual comparison it has not been a good year for net exporters.

Foreign trade fell dramatically also compared with a year earlier. Exports of goods and services fell by 22.2% (price-adjusted) in the 2nd quarter of 2020 year on year. Imports did not drop as strongly (-17.3%) over that period.

Something else which you might reasonably consider to be not very Germanic has been in play.

Only final consumption expenditure of general government had a stabilising effect; it was 1.5% higher than in the previous quarter and prevented an even larger GDP decrease………( and the annual data)  In contrast, an additional 3.8% in government final consumption expenditure prevented the economy from crashing even more.

We know that the unemployment numbers have been actively misleading in the pandemic but I note that the hours worked data gives a similar picture to GDP.

The labour volume of the overall economy, which is the total number of hours worked by all persons in employment, declined even more sharply by 10.0% over the same period.

This had an inevitable consequence for productivity.

Labour productivity per person in employment slumped by as much as 10.2% compared with the 2nd quarter of 2019.

Savings

I thought I would pick this out as it is a clear development in the Covid era.

The relatively stable incomes, on the one hand, and consumer reticence, on the other, resulted in a substantial rise in household saving. According to provisional calculations, the savings ratio nearly doubled to 20.1% in the 2nd quarter of 2020 year on year (2nd quarter 2019: 10.2%).

Looking Ahead

This morning’s IFO release tells us this.

Sentiment among German business leaders is continuing to improve. The ifo Business Climate Index rose from 90.4 points (seasonally adjusted)  in July  to 92.6 points in August. Companies assessed their current business situation markedly more positively than last month. Their expectations were also slightly more optimistic. The German economy is on the road to recovery.

Although a somewhat different context was provided by this.

In manufacturing, the business climate improved considerably. Companies’ assessments of their current situation jumped higher. Nevertheless, many industrial companies still consider their current business to be poor. The outlook for the coming months was again more optimistic. Order books are filling once more.

That showed a welcome improvement but only to a level considered to be poor so it is hardly surprising they are optimistic relative to that. Indeed trade seems to have engaged reverse gear.

In trade, the upward trend in the business climate flattened noticeably. Companies were somewhat more satisfied with their current situation. However, their pessimism regarding the coming months was almost unchanged. In wholesale, the business climate in fact fell back.

Perhaps they are getting a little more like us in the UK as the services sector seems to be on the road to recovery.

In the service sector, the Business Climate Index rose strongly. Service providers were decidedly happier with their current business situation. Their outlook for the coming six months also improved further.

Considering the GDP numbers you might think that construction would be more upbeat.

In construction, the business climate continues to improve. Construction companies were again happier with their current situation. However, their expectations are still pessimistic, albeit less so than last month.

Comment

If we take the example below where would that leave Germany?

Germany IFO expects GDP growth of around 7% in Q3 ( DailyFX.com )

If we take the unadjusted figure of 93.46 for the second quarter then we will rise to 100 or if you prefer we will have stepped back in time to 2015. So the “Euro boom” and all the ECB backslapping will have been wiped out. The 7% economic growth recorded over the period will be ground that will have to be re-taken. That will be not so easy as we see renewed but hopefully more minor Covid-19 outbreaks in other parts of the Euro area.

I am a little unclear how @Economist_Kat gets to this.

#Germany: #ifo survey results for August are consistent with the economy moving into Boom territory.

Perhaps too much kool-aid. According to a @LiveSquawk the official view is that things can only get better.

German FinMin Scholz: Economy Developing Better Than Expected

Meanwhile official policy has the pedal to the metal with an official interest-rate for banks at -1% and two QE bond buying schemes running at once. We also have fiscal policy being deployed on a grand scale, especially for Germany. There is little scope for it to do more.

 

 

 

 

 

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.

If Lagarde expects disinflation then we should fear inflation….

Today brings the economy of the Euro area in to focus. Over the weekend we heard from the President of the European Central Bank or ECB.

(Bloomberg) — European Central Bank President Christine Lagarde said the euro zone faces about two years of downward pressure on prices, but could see a turnaround after that because the coronavirus crisis will accelerate the transformation of the economy.

There is an obvious issue in forecasting 2 years ahead when we struggle to know what will happen in two weeks. Even worse is Christine Lagarde’s record as according to her both Greece and Argentina were going to grow in such a timescale when in fact their economies collapsed. Her policies are also doing the best they can to slow the transformation of the economy via the support of zombie banks and companies.

The reality is that the forecast is to justify decisions that have already been taken.

In the meantime, the central bank will need to keep its monetary policy exceptionally loose, and financial instruments will need to be developed that allow the economic transformation to be funded, she said.

Also there is an opportunity to find a scapegoat for an effect of her policies.

Still, she warned that pandemics typically increase inequality, with economic and social consequences that the central bank will have to take into account.

You also might think that she would be too busy with the day job to take on other things but apparently not.

“I am determined to have the same debate with governors at the ECB to ensure that in all areas, climate risk and biodiversity is taken into account,” she said. “We won’t do it in one day, but we must question in every domain, stress test by stress test.”

Also on Friday the ECB released this.

They’re here! We’ve just received the first banknotes featuring President Lagarde’s signature. The €5 and €10 notes will be the first with the new signature to enter into circulation, starting next week. Those with the signature of former presidents will remain legal tender.

Sadly they have ignored my suggestion that some of the notes should have been orange to mark the occasion.

German Manufacturing

This is something of a bellweather for the Euro area economy and trade. So let’s start with the positive bit.

WIESBADEN – According to provisional results of the Federal Statistical Office (Destatis), real (price adjusted) new orders increased by a seasonally and calendar adjusted 10.4% in May 2020 compared with April 2020.

As I am sure you were expecting the annual comparison whilst better than April’s -36.9% remains grim.

 Compared with May 2019, the decrease in calendar adjusted new orders amounted to 29.3%

If we go to the underlying index then total orders are at 71.1% of the 2015 average. There is a clear geographic pattern to this.

Domestic orders increased by 12.3% and foreign orders rose by 8.8% in May 2020 on the previous month. New orders from the euro area went up 20.9%, and new orders from other countries increased by 2.0% compared with April 2020.

Also I did start with a mention of a bellweather.

New orders in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, new orders were still more than 47% lower than in February 2020.

We can also look at turnover.

According to provisional results, price-adjusted turnover in manufacturing in May 2020 went up a seasonally and calendar adjusted 10.6% on the previous month…….

Compared with February 2020, the month before restrictions were imposed due to the corona pandemic in Germany, turnover in May 2020 was 23.5% lower in seasonally and calendar adjusted terms.

Again the car industry has been heavily affected and of course 2019 was considered a ropey year at the time.

Turnover in the automotive industry increased again markedly in May 2020, after very low levels in April 2020. However, it was still nearly 47% lower than in February 2020.

Construction

We have learned that the Purchasing Managers Indices have their issues but here is this morning’s update.

The IHS Markit Eurozone Construction Total Activity Index rose sharply from 39.5 in May to 48.3 in June, indicating the weakest decline in construction activity across the eurozone since February amid a relaxation of measures designed to control the coronavirus disease 2019 (COVID-19) pandemic. Survey data showed France and Italy recorded construction output growth, while Germany posted a further marked decline.

Let us move on noting that Germany seems to be struggling across a few areas.

Retail Sales

Having seen the sad news about Ennio Morricone let is look at first the good.

In May 2020, when Member States began easing the COVID-19 containment measures, the seasonally adjusted
volume of retail trade increased by 17.8% in the euro area and by 16.4% in the EU, compared with April 2020,
according to estimates from Eurostat.

The bad is that volume is only 102% of the average for 2015 so the Euro  boom has gone for now and also this.

In May 2020 compared with May 2019, the calendar adjusted retail sales index decreased by 5.1% in the euro
area and by 4.2% in the EU.

The ugly is Greece which saw retail sales collapse as to return to my opening theme Christine Lagarde predicted “Shock and Awe”. Just to show how big the move was if we stay with 2015 as our benchmark then April 2007 was 167% of it as opposed to the 74.7% of this April. That is how you define an ongoing depression which sadly has been pushed even deeper by the economic impact of the Covid-19 virus pandemic. Also after all the reform rhetoric of the IMF and Euro area authorities I note that Greece has not yet produced numbers for May in this area.

Zombie! Zombie! Zombie!

This morning has seen the release of a ECB working paper which has made me mull those famous song lyrics, why? Well we get an official denial.

As regards the distribution of the funds, in contrast to the common perception about take-up in
central bank operations in crisis times, we do not find strong evidence that TLTRO funds end up
importantly with financially weak banks. If anything, banks with a larger capital buffer take up more.

You may note the use of “strong evidence” “importantly” and “if anything”. To which we can add “dominant” below.

The TLTRO funds do not end up dominantly with financially weak banks.

Indeed is weak banks are no big deal it makes you wonder why they bothered with this?

In addition, applying different lending benchmark requirements to banks depending on their deleveraging pressure appears to have been important to have take-up also by deleveraging banks.

or this.

namely by reducing the TLTRO interest rate and expanding the amount and types of eligible collateral.

This has become even for these times a big deal.

This paper asks what characterises and incentivises individual banks to take this “funding for
lending” which peaked at EUR 762 billion and what role the parameters of the scheme play.

Comment

Today’s article has been topped and tailed by the ECB and its activities. In the middle we have noted the effect of the lockdowns and pandemic. But if we look ahead the issue switches to what type of future it wants? For all the rhetoric the Euro area was already struggling highlighted by the way that the end of QE lasted for about 9 months. Curious as according to Christine Lagarde things are well placed.

Europe is in an excellent position to join this transition, according to Lagarde. The continent has the world’s largest circular economy and ecological innovation sector while the euro is the first currency used for the issuing of green bonds, she noted. ( Brussels Times)

Perhaps going round in circles is not the best analogy. Still there is time to be a control freak because it has gone so well?

However, this would not be enough and an economic policy framework that allows the required financing to be mobilized will need to be put in place, according to Lagarde.

Podcast

 

The Euro area has an inflation problem that the ECB ignores

Yesterday brought us up to date with the thoughts of ECB President Christine Lagarde as she gave evidence to the European Parliament, and grim reading and listening it made.

After a contraction in GDP of 3.8% in the first quarter of the year, our new staff projections see it shrinking by 13% in the second quarter. Despite being expected to bounce back later in the year and recover some of its lost ground, euro area real GDP is now projected to fall by 8.7% over the whole of 2020, followed by growth of 5.2% in 2021 and 3.3% in 2022.

The numbers for 2021 and 22 are pure fantasy of course an area where President Lagarde has quite a track record after her claims about Greece and Argentina. But the fundamental polnt here is of a large and in many ways unprecedented fall in this quarter.

Germany

We have received some hints this morning via the April trade figures for the Euro areas largest economy Germany.

WIESBADEN – Germany exported goods to the value of 75.7 billion euros and imported goods to the value of 72.2 billion euros in April 2020. Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports decreased by 31.1% and imports by 21.6% in April 2020 year on year.

In a pandemic it is no surprise that trade is hit harder than economic output or GDP and the impact was severe.

That was the largest decline of exports in a month compared with the same month a year earlier since the introduction of foreign trade statistics in 1950. The last time German imports went down that much was in July 2009 during the financial crisis (-23.6%).

This meant that the German trade surplus which is essentially the Euro area one faded quite a bit.

The foreign trade balance showed a surplus of 3.5 billion euros in April 2020. That was the lowest export surplus shown for Germany since December 2000 (+1.7 billion euros). In April 2019, the surplus was 17.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 3.2 billion euros in April 2020.

In itself that is far from a crisis as both Germany and the Euro area have had plenty of surpluses in this area. But it will be a subtraction to GDP although some will be found elsewhere.

exports to the countries hit particularly hard by the corona virus pandemic dropped sharply from April 2019: France (-48.3%), Italy (-40.1%) and the United States (-35.8%).

So for the first 2 countries the falls will be gains although of course they will have their own losses.

There was a considerable decline in German imports from France (-37.3% to 3.5 billion euros) and Italy (-32.5% to 3.2 billion euros).

So we have a sharp impact on the economy although we need the caveat that these compete with retail sales to be the least reliable numbers we have.

Inflation

If we return to President Lagarde there was also this.

The sharp drop in economic activity is also leaving its mark on euro area inflation. Year-on-year HICP inflation declined further to 0.1% in May, mainly due to falling oil prices. Looking ahead, the inflation outlook has been revised downwards substantially over the entire projection horizon. In the baseline scenario, inflation is projected to average 0.3% in 2020, before rising slightly to 0.8% in 2021, and further to 1.3% in 2022.

There are serious problems with inflation measurement right now and let me explain them.

The HICP sub-indices are aggregated using weights reflecting the household consumption expenditure patterns of the previous year.

This is clearly an issue when expenditure patterns have changed so much. This is illustrated by the area highlighted by President Lagarde oil prices as we note automotive fuel demand was down 46.9% on a year ago. So she is being very misleading. Also I am regularly asked about imputed rent well it has plenty of company right now.

The second principle means that all sub-indices for the full ECOICOP structure will be compiled even when for some categories no products are available on the market. In such cases prices do not exist and they should be replaced with imputed prices.

So if you cannot get a price you make it up. You really could not er make it up…..

Also online quotes are used if necessary. That reflects reality but there is a catch as the prices are likely to be lower than store prices in more than a few cases.

What you might think are minor issues can turn into big ones as we saw last year from a rethink of the state of play concerning package holidays in Germany.

In the following years, the impact of the revision is smaller, between -0.2 and +0.3 p.p. Consequently, the euro area all-items annual rates are revised between 0.0 and +0.3 p.p. in 2015 and between -0.1 and +0.1 p.p. after.

Yes it did change the overall number for the Euro area which is I suppose a case f the mouse scaring and moving the elephant. This really matters when we are told this.

 the deteriorating inflation outlook threatening our medium-term price stability objective.

So we got this in response to a number which is dodgy to say the least.

The Governing Council last Thursday decided to increase the amount of the pandemic emergency purchase programme (PEPP) by an additional €600 billion to a total of €1,350 billion, to extend the net purchase horizon until at least the end of June 2021, and to reinvest maturing assets acquired under the programme until at least the end of 2022.

In context there is also this from Peter Schiff which raises a wry smile.

ECB Pres. Christine Lagarde claims that emergency action is necessary to protect Europeans from a mere 1.3% rise in their cost of living in the year 2022. Lagarde said such a small rise is inconsistent with the ECB’s goal of price stability. Prices must rise more to be stable.

George Orwell must wish he had put that in 1984, although to be fair his themes were spot on. He would have enjoyed how Christine Lagarde sets as her objective making people worse off.

The ECB measures will continue to be crucial in supporting the return of inflation towards our medium-term inflation aim after the worst of the crisis has passed and the euro area economy begins its journey to economic recovery.

Let’s face it even the (wo)man on Mars will probably be aware that these days wages do not necessarily grow faster than prices.

Comment

Let me now spin around to the real game in town for central bankers which is financial markets. Once they had helped the banks by letting them benefit from a -1% interest-rate which of course will in the end be paid by everyone else then boosting asset markets is the next game in town. I have already mentioned the large sums being invested to help governments borrow more cheaply with the 1.35 trillion. As a former finance minister Christine Lagarde can look forwards to being warmly welcomed at meetings with present finance ministers. After all Germany is being paid to borrow and even Italy only has a ten-year yield of 1.42% in spite of having debt metrics which are beginning to spiral.

Next comes equity markets where the Euro Stoxx 50 index was at one point yesterday some 1000 points higher than the 2386 of the 19th of March. The link from all the QE is of portfolio shifts as for example bonds providing less ( and in many cases negative income) make dividends from shares more attractive. As an aside this poses all sorts of risks from pensions investing in wrong areas.

But my main drive is that central banks can push asset prices higher but the problem is that the asset rich benefit but for everyone else there is them inflation. The inflation is conveniently ignored as those responsible for putting housing inflation in the numbers have been on a 20 year holiday. As even the ECB confesses that sector makes up a third of consumer spending you can see again how the numbers are misleading. Or to put it another way how the ordinary person is made worse off whilst the better off gain.

The problems posed by mass unemployment

A sad consequence of the lock downs and the effective closure of some parts of the economy is lower employment and higher unemployment. That type of theme was in evidence very early today as we learnt that even the land “down under” looks like it is in recession after recording a 0.3% decline in the opening quarter of 2020. The first for nearly 30 years as even the commodities boom seen has been unable to resist the effects of the pandemic. This brings me to what Australia Statistics told us last month.

Employment decreased by 594,300 people (-4.6%) between March and April 2020, with full-time employment decreasing by 220,500 people and part-time employment decreasing by 373,800 people.Compared to a year ago, there were 123,000 less people employed full-time and 272,000 less people employed part-time. Thischange led to a decrease in the part-time share of employment over the past 12 months, from 31.5% to 30.3%.

I have opened with the employment data as we get a better guide from it in such times although to be fair it seems to be making a fist of the unemployment position.

The unemployment rate increased 1.0 points to 6.2%and was 1.0 points higher than in April 2019. The number of unemployed people increased by 104,500 in April 2020 to 823,300 people, and increased by 117,700 people from April 2019.

The underemployment rate increased by 4.9 pts to 13.7%, the highest on record, and was 5.2 pts higher than in April 2019.The number of underemployed people increased by 603,300 in April 2020 to 1,816,100 people, an increase of almost 50% (49.7%), and increased by 666,100 people since April 2019.

As you can see they have picked up a fair bit of the changes and it is nice to see an underemployment measure albeit not nice to see it rise so much. The signal for the Australian economy in the quarter just gone is rather grim though especially if we note this.

Monthly hours worked in all jobs decreased by 163.9 million hours (-9.2%) to 1,625.8 million hours in April 2020, larger than the decrease in employed people.

Italy

In line with our “Girlfriend in a coma” theme one fears the worst for Italy now especially as we note how hard it was hit by the virus pandemic. Even worse a mere headline perusal is actively misleading as I note this from Istat, and the emphasis is mine.

In April 2020, in comparison with the previous month, employment significantly decreased and unemployment sharply fell together with a relevant increase of inactivity.

The full detail is below.

In the last month, also the remarkable fall of the unemployed people (-23.9%, -484 thousand) was recorded for both men (-17.4%, -179 thousand) and women (-30.6%, -305 thousand). The unemployment rate dropped to 6.3% (-1.7 percentage points) and the youth rate fell to 20.3% (-6.2 p.p.).

Yes a number which ordinarily would be perceived as a triumph after all the struggles Italy has had with its economy and elevated unemployment is at best a mirage and at worst a complete fail for the methodology below.

Unemployed persons: comprise persons aged 15-74 who:
were actively seeking work, i.e. had carried out activities in the four week period ending with the reference week
to seek paid employment or self-employment and were available to start working before the end of the two
weeks following the reference week;

Some would not have bothered to look for work thinking it was hopeless and many of course would simply have been unable to. We do find them elsewhere in the data set.

In April the considerable growth of inactive people aged 15-64 (+5.4%, +746 thousand) was registered for
both men (+6.0%, +307 thousand) and women (+5.0%, +438 thousand), leading the inactivity rate to
38.1% (+2.0 percentage points).

If we look back we see that there was a similar issue with the March numbers so a published unemployment rate of 6.3% looks like one of over 11% if we make some sort of correction for the April and March issues.

We get a better guide to the state of play from the employment position which as we observe from time to time has become something of a leafing indicator.

On a monthly basis, the decline of employment (-1.2%, -274 thousand) concerned both men (-1.0%, -131 thousand) and women (-1.5%, -143 thousand), and brought the employment rate to 57.9% (-0.7 p. p.)…….With respect to the previous quarter, in the period February – April 2020, employment considerably decreased (-1.0%, -226 thousand) for both genders…….Compared to March 2019, employment showed a decrease in terms of figures (-2.1%, -497 thousand) and rate (-1.1 percentage points).

Oh and in the last sentence they mean April rather than March. But looking ahead we see a 1.2% fall for employment in April alone which has implications for GDP and of course it is before the furlough scheme.

 Italy has furloughed 7.2 million workers, equivalent to 31% of employment at end-2019; ( FitchRatings )

Germany

This morning has also brought news about the state of play in Germany.

WIESBADEN – Roughly 44.8 million persons resident in Germany (national concept) were in employment in April 2020 according to provisional calculations of the Federal Statistical Office (Destatis). Compared with April 2019, the number of persons in employment decreased by 0.5% (-210,000). This means that for the first time since March 2010 the number of persons in employment decreased year on year (-92,000; -0.2%). In March 2020, the year-on-year change rate had been +0.2%.

For our purposes we get a signal from this.

According to provisional results of the employment accounts, the number of persons in employment fell by 161,000 in April 2020 on the previous month. Normally, employment rises strongly in April as a result of the usual spring upturn, that is, by 143,000 in April on an average of the last five years.

Perhaps the headline read a lot better in German.

No spring upturn

Switching to unemployment the system seems less flawed than in Italy.

Results of the labour force survey show that 1.89 million people were unemployed in April 2020. That was an increase of 220,000, or 13.2%, on March 2020. Compared with April 2019, the number of unemployed persons increased by 515,000 or +38.0%. The unemployment rate was 4.3% in April 2020.

There is a clear conceptual issue here if we return to Fitch Ratings.

Germany has enrolled more than 10 million workers on its scheme, representing 22% of employment at the end-2019. This number ultimately may be lower because some firms that have registered employees as a precaution may decide not to participate.

Germany employed the Kurzarbeit to great effect during the global financial crisis when its implementation prevented the mass lay-offs that were seen elsewhere in Europe. While unemployment in Germany remained broadly unchanged in 2008-2009, other countries reported significant increases.

Comment

There are deep sociological and psychological impacts from these numbers and let me give my sympathies to those affected. Hopefully we can avoid what happened in the 1930s. Returning to the statistics there are a litany of issues some of which we have already looked at. Let me point out another via the German employment data.

After seasonal adjustment, that is, after the elimination of the usual seasonal fluctuations, the number of persons in employment decreased by 271,000 (-0.6%) in April 2020 compared with March 2020.

The usual pattern for seasonal fluctuations will be no guide this year and may even be worse than useless but it will still be used in the headline data. But there is more if we switch to Eurostat.

In April 2020, the second month after COVID-19 containment measures were implemented by most Member
States, the euro area seasonally-adjusted unemployment rate was 7.3%, up from 7.1% in March 2020. The EU
unemployment rate was 6.6% in April 2020, up from 6.4% in March 2020.

We have the issue of Italy recording a large rise as a fall but even in Germany there is an issue as I note an unemployment rate of 4.3%. Well after applying the usual rules Eurostat has published it at 3.5%. There is no great conspiracy here as the statisticians apply rules which are supposed to make things clearer but some extra thought is requited as we note they are in fact making the numbers pretty meaningless right now, or the opposite of their role.

The Investing Channel

 

 

 

 

Eurobonds To be? Or not to be?

We find that some topics have a habit of recurring mostly because they never get quite settled, at least not to everyone’s satisfaction. At the time however triumph is declared as we enter a new era until reality intervenes, often quite quickly. So last night’s Franco-German announcement after a virtual summit caught the newswires.

France and Germany are proposing a €500bn ($545bn; £448bn) European recovery fund to be distributed to EU countries worst affected by Covid-19.

In talks on Monday, French President Emmanuel Macron and German Chancellor Angela Merkel agreed that the funds should be provided as grants.

The proposal represents a significant shift in Mrs Merkel’s position.

Mr Macron said it was a major step forward and was “what the eurozone needs to remain united”. ( BBC)

Okay and there was also this reported by the BBC.

Mrs Merkel, who had previously rejected the idea of nations sharing debt, said the European Commission would raise money for the fund by borrowing on the markets, which would be repaid gradually from the EU’s overall budget.

There are a couple of familiar features here as we see politicians wanted to spend now and have future politicians ( i.e not them face the issues of paying for it). There is an undercut right now in that the choice of Frau Merkel reminds those of us who follow bond markets that Germany is being paid to borrow with even its thirty-year yield being -0.05%. So in essence the other countries want a slice of that pie as opposed to hearing this from Germany.

Money, it’s a crime
Share it fairly but don’t take a slice of my pie
Money, so they say
Is the root of all evil today
But if you ask for a raise it’s no surprise that they’re
Giving none away, away, away ( Pink Floyd)

Actually France is often paid to borrow as well ( ten-year yield is -0.04%) but even it must be looking rather jealously at Germany.Here is how Katya Adler of the BBC summarised its significance.

Chancellor Merkel has conceded a lot. She openly agreed with the French that any money from this fund, allocated to a needy EU country, should be a grant, not a loan. Importantly, this means not increasing the debts of economies already weak before the pandemic.

President Macron gave ground, too. He had wanted a huge fund of a trillion or more euros. But a trillion euros of grants was probably too much for Mrs Merkel to swallow on behalf of fellow German taxpayers.

She has made a technical error, however, as Eurostat tends to allocate such borrowing to each country on the grounds of its ECB capital share. So lower borrowing for say Italy but not necessarily zero.

The ECB

Its President Christine Lagarde was quickly in the press.

So there is zero risk to the euro?

Yes. And I would remind you that the euro is irreversible, it’s written in the EU Treaty.

Of course history is a long list of treaties which have been reversed. Also there was the standard tactic when challenged on debt which is whataboutery.

Every country in the world is seeing its debt level increase – according to the IMF’s projections, the debt level of the United States will reach more than 130% of GDP by the end of this year, while the euro area’s debt will be below 100% of GDP.

Actually by trying to be clever there, she has stepped on something of a land mine. Let me hand you over to the French Finance Minister.

French Finance Minister Bruno Le Maire said on Tuesday, the European Union (EU) recovery fund probably will not be available until 2021.

The 500 bln euro recovery fund idea is a historic step because it finances budget spending through debt, he added. ( FXStreet )

So the height of the pandemic and the economic collapse will be over before it starts? That is an issue which has dogged the Euro area response to not only this crisis but the Greek and wider Euro area one too. It is very slow moving and in the case of Greece by the time it upped its game we had seen the claimed 2% per annum economic growth morph into around a 10% decline meaning the boat had sailed. In economic policy there is always the issue of timing and in this instance whatever you think of the details of US policy for instance it has got on with it quickly which matters in a crisis.

Speaking of shooting yourself in the foot there was also this.

Growth levels and prevailing interest rates should be taken into account, as these are the two key elements.

The latter is true and as I pointed out earlier is a strength for many Euro area countries but the former has been quite a problem. Unless we see a marked change we can only expect the same poor to average performance going ahead. Mind you we did see a hint that her predecessor had played something of a Jedi Mind Trick on financial markets.

Outright Monetary Transactions, or OMTs, are an important instrument in the European toolbox, but they were designed for the 2011-12 crisis, which was very different from this one. I don’t think it is the tool that would be best suited to tackling the economic consequences of the public health crisis created by COVID-19.

They had success without ever being used.

Market Response

Things have gone rather well so far. The Euro has rallied versus the US Dollar towards 1.10 although it has dipped against the UK Pound. Bond markets are more clear cut with the Italian bond future rising over a point and a half to above 140 reducing its ten-year yield to 1.62%. The ten-year yield in Spain has fallen to 0.7% as well. It seems a bit harsh to include Spain after the economic growth spurt we have seen but nonetheless maybe it did not reach escape velocity.

Comment

Actually there already are some Eurobonds in that the ESM ( European Stability Mechanism) has issued bonds in the assistance programmes for Greece, Italy, Portugal and Spain. Although they were secondary market moves mostly allowing countries to borrow more cheaply rather than spend more. On that subject I guess life can sometimes come at you fast as how is this going?

Taking into account these measures, the
government remains committed to meeting the
primary fiscal surplus for 2020 and forecasts a
primary surplus at  3.6% of GDP ( Greece Debt Office)

On the other side of the coin it will be grateful for this.

81% of the debt stock is held by official sector creditors,
allowing for long term maturity profile and low interest
rates

On a Greek style scale the 500 billion Euros is significant but now we switch to Italy we see that suddenly the same sum of money shrinks a lot. I notice that Five Star ( political party not the band) have already been on the case.

It’s just too little, too late
A little too long
And I can’t wait ( JoJo)

This brings me to the two real issues here of which the first is generic. In its history fiscal policy finds that it can not respond quickly enough which is why the “first responder” is monetary policy. The problem is that the ECB has done this so much it is struggling to do much more and the European Union is always slow to use fiscal policy. Such as it has then the use has been in the other direction via the Stability and Growth Pact.

Next comes the fact that there are 19 national treasuries to deal with for the Euro and 27 for the European Union as I note that last night’s deal was between only 2 of them. Perhaps the most important ones but only 2.

Economic growth German style has hit the buffers

Today gives us the opportunity to look at the conventional and the unconventional so let us crack on via the German statistics office.

WIESBADEN – The corona pandemic hits the German economy hard. Although the spread of the coronavirus did not have a major effect on the economic performance in January and February, the impact of the pandemic is serious for the 1st quarter of 2020. The gross domestic product (GDP) was down by 2.2% on the 4th quarter of 2019 upon price, seasonal and calendar adjustment. That was the largest decrease since the global financial and economic crisis of 2008/2009 and the second largest decrease since German unification. A larger quarter-on-quarter decline was recorded only for the 1st quarter of 2009 (-4.7%).

So we start with a similar pattern to the UK as frankly a 0.2% difference at this time does not mean a lot. Also we see that this is essentially what we might call an Ides of March thing as that is when things headed south fast. However some care is needed because of this.

The recalculation for the 4th quarter of 2019 has resulted in a price-, seasonally and calendar-adjusted GDP decrease of 0.1% on the previous quarter (previous result: 0.0%).

For newer readers this brings two of my themes into play. The first is that I struggled to see how Germany came up with a 0% number at the time ( and this has implications for the Euro area GDP numbers too). If they were trying to dodge the recession definition things have rather backfired. The second is that Germany saw its economy turn down in early 2018 which is quite different to how many have presented it. Some of the news came from later downwards revisions which is obviously awkward if you only read page one, but also should bring a tinge of humility as even in more stable times we know less than we might think we do.

Switching now to the context there are various ways of looking at this and I have chosen to omit the seasonal adjustment as right now it will have failed which gives us this.

a calendar-adjusted 2.3%, on a year earlier.

No big change but it means in context that the economy of Germany has grown by 4% since 2015 or if you prefer returned to early 2017.

In terms of detail we start with a familiar pattern.

Household final consumption expenditure fell sharply in the 1st quarter of 2020. Gross fixed capital formation in machinery and equipment decreased considerably, too.

But then get something more unfamiliar when we not we are looking at Germany.

However, final consumption expenditure of general government and gross fixed capital formation in construction had a stabilising effect and prevented a larger GDP decrease.

So the German government was already spending more although yesterday brought some context into this.

GERMAN FINANCE MIN. SCHOLZ: OUR FISCAL STIMULUS MEASURES WILL BE TIMELY, TARGETED, TEMPORARY AND TRANSFORMATIVE. ( @FinancialJuice )

As he was talking about June I added this bit.

and late…….he forgot late….

Actually they have already agreed this or we were told that.

Germany has approved an initial rescue package worth over 750 billion euros to mitigate the impact of the coronavirus outbreak, with the government taking on new debt for the first time since 2013.

The first package agreed in March comprises a debt-financed supplementary budget of 156 billion euros and a stabilisation fund worth 600 billion euros for loans to struggling businesses and direct stakes in companies. ( Reuters )

Warnings

There is this about which we get very little detail.

Both exports and imports saw a strong decline on the 4th quarter of 2019.

If we switch to the trade figures it looks as though they were a drag on the numbers.

WIESBADEN – Germany exported goods to the value of 108.9 billion euros and imported goods to the value of 91.6 billion euros in March 2020. Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports declined by 7.9% and imports by 4.5% in March 2020 year on year.

Ironically this gives us something many wanted which is a lower German trade surplus but of course not in a good way. A factor in this will be the numbers below which Google Translate has allowed me to take from the German version.

Passenger car production (including motorhomes) was compared to March 2019
by more than a third (-37%) and compared to February 2020 by more than a quarter (-27%)
around 285,000 pieces back.

The caveats I pointed out for the UK about seasonality, inflation and the (in)ability to collect many of the numbers will be at play here.

Looking Ahead

The Federal Statistics Office has been trying to innovate and has been looking at private-sector loan deals.

The preliminary low was the week after Easter (16th calendar week from April 13th to 19th) with 36.7% fewer new personal loan contracts than achieved in the previous week. Since then, the new loan agreements have ranged from around 30% to 35% below the same period in the previous year.

That provides food for thought for the ECB and Christine Lagarde to say the least.

Also in an era of dissatisfaction with conventional GDP and the rise of nowcasting we have been noting this.

KÖLN/WIESBADEN – The Federal Office for Goods Transport (BAG) and the Federal Statistical Office (Destatis) report that the mileage covered by trucks with four or more axles, which are subject to toll charges, on German motorways decreased a seasonally adjusted 10.9% in April 2020 compared with March 2020. This was an even stronger decline on the previous month than in March 2020, when a decrease of -5.8% on February 2020 had been recorded, until then the largest month-on-month decline since truck toll was introduced in 2005.

That is quite a drop and leaves us expecting a 10%+ drop for GDP in Germany this quarter especially as we note that many service industries have been hit even harder.

Comment

I promised you something unconventional so let me start with this.

Covid-19 has uncovered weaknesses in France’s pharmaceutical sector. With 80 percent of medicines manufactured in Asia, France remains highly dependent on China and India. Entrepreneurs are now determined to bring France’s laboratories back to Europe. ( France24 )

I expect this to be a trend now and will be true in much of the western world. But this ball bounces around like Federer versus Nadal. Why? Well I immediately thought of Ireland which via its tax regime has ended up with a large pharmaceutical sector which others may now be noting. Regular readers will recall the times we have looked at the “pharmaceutical cliff” there when a drug has lost its patent and gone full generic so to speak. That might seem odd but remember there were issues about things like paracetamol in the UK for a bit.

That is before we get to China and the obvious issues in may things have effectively been outsourced to it. Some will be brought within national borders which for Germany will be a gain. But the idea of trade having a reversal is not good for an exporter like Germany as the ball continues to be hit. Perhaps it realises this hence the German Constitutional Court decision but that risks upsetting a world where Germany is paid to borrow and of course a new Mark would surge against any past Euro value.

 

Can the ECB save the Euro again?

A feature of the credit crunch and the Euro area crisis has been the behaviour of the European Central Bank or ECB. It’s role has massively expanded from the official one of aiming for an inflation rate ( CPI and thereby ignoring owner-occupied housing) of close to but just below 2%. In fact in his valedictory speech the former ECB President Jean Claude Trichet defined it as 1.97%. However times have changed and the next President upped the ante with his “Whatever it takes ( to save the Euro) speech giving the ECB roles beyond inflation targeting. But Mario Draghi also regularly told us that the ECB was a “rules-based organisation.”

On 18 March 2020, the Governing Council also decided that to the extent some self-imposed limits might hamper
action that the Eurosystem is required to take in order to fulfil its mandate, the Governing Council will consider
revising them to the extent necessary to make its action proportionate to the risks faced. ( ECB )

Well not those rules anyway which limited purchases to 33% of a bond. Oh and the rules against monetary financing seem to be getting more shall we say flexible too.

The residual maturity of public sector securities purchased under the PEPP ranges from 70 days up to 30 years and 364 days. For private securities eligible under the CSPP, the maturity range is from 28 days up to 30 years and 364 days. For ABSPP and CBPP3-eligible securities, no maturity restrictions apply. ( ECB)

There were rules which meant that Greece would not qualify for QE too but as we noted before they have gone.

 In addition, the PEPP includes a waiver of the eligibility requirements for securities issued by the Greek Government.

So as you can see the rules are only there until they become inconvenient. What we do not so far have unlike as has been claimed by some if that this policy is unlimited, although of course after all the ch-ch-changes it would hardly be a surprise if the new 750 billion Euro programme ended up being larger. Oh and they join their central banking cousins with this.

The additional temporary envelope of €750 billion under the PEPP is separate from and in addition to the net purchases under the APP.

Ah Temporary we know what that means…..

Bond Markets

These will be regarded as a success by the ECB as for example the ten-year yield in Germany is -0.44%. So in spite of the announcement of an extra 350 billion in debt to be issued Germany continues to be paid to borrow. So the ECB will regard itself as essentially financing the new German fiscal policy.

At the other end of the spectrum is Italy where the public finances are much worse. But the ten-year yield is 1.3% which is far below the nearly 3% it rose to after ECB President Lagarde stated that it was not its role to deal with “bond spreads” managing in one sentence to undo the main aim of her predecessor. As you can see the bond yield is under control in fact very strict control and I will return to this later.

Fiscal Policy

The ECB will be happy to see individual countries loosen the purse strings and especially Germany. The latter is something it has been keen on as the credit crunch develops. It is after all the largest economy and has had the most flexibility to do so. It would also help with the imbalances in both the Euro and world economies. However the collective response will have disappointed it.

We take note of the progress made by the Eurogroup. At this stage, we invite the Eurogroup to present proposals to us within two weeks.

At a time like this that seems a lot more than just leisurely. From the US Department of Labor.

In the week ending March 21, the advance figure for seasonally adjusted initial claims was 3,283,000, an increase of 3,001,000 from the previous week’s revised level. This marks the highest level of seasonally adjusted initial claims in the history of the seasonally adjusted series. The previous high was 695,000 in October of 1982.

That is for the US and not the Euro area but it does give us a handle on the size of the economic shock reverberating around the world. If it was a drum beat then it would require Keith Moon to play it.

Italy

We have some economic news from Italy but before I get to it we were updated this month by the IMF.

Compared to the staff report, staff have revised the growth forecast for 2020 down from about ½ percent to about ‒½ percent.

Actually that’s what we thought before all this. Please fell free to laugh at the next bit.

Altogether, staff projects an overall deficit of 2.6 percent of GDP in 2020

At some point they do seem to get a grip but then lose it in the medium-term.

Given the escalated lockdown measures and the wider
outbreak across Europe, there is a high risk of a notably weaker outturn. Growth over the medium term is projected at around 0.7 percent, although this too is subject to uncertainty about the duration and extent of the crisis.

I have long been critical of these long-term forecasts which frankly do more to reflect the author’s own personal biases than any likely reality.

If we switch to the Statistics Office we were told this earlier.

In March 2020, the consumer confidence climate slumped from 110.9 to 101.0. The heavy deterioration affected all index components. More specifically, the economic climate plummeted from 121.9 to 96.2, the personal one deteriorated from 107.8 to 102.4, the current one went down from 110.6 to 104.8 and, finally, the future one collapsed from 112.0 to 94.8.

Grim numbers indeed and as they only went up to the 13th of this month we would expect them to be even worse now.

Also there was something of a critique of the Markit IHS manufacturing numbers from earlier this week as this is much worse than indicated there.

The confidence index in manufacturing drastically reduced passing from 98.8 to 89.5. The assessments on order books fell from -15.6 to -23.9 and the expectations on production dropped from 0.7 to -17.1.

Retail too was hit hard.

The retail trade confidence index plummeted from 106.9 to 97.4. The drastic worsening affected in particular the expectations on future business whose balance tumbled from 28.0 to -9.4.

Comment

I have so far avoided the issue of Eurobonds or as they have been rebranded Corona Bonds. Mario Draghi wrote a piece in the Financial Times essentially arguing for them but there are clear issues. One is the grip on reality being displayed.

In some respects, Europe is well equipped to deal with this extraordinary shock. It has a granular financial structure able to channel funds to every part of the economy that needs it. It has a strong public sector able to co-ordinate a rapid policy response. Speed is absolutely essential for effectiveness.

Can we really see the Italian banking sector for example doing this?

And it has to be done immediately, avoiding bureaucratic delays. Banks in particular extend across the entire economy and can create money instantly by allowing overdrafts or opening credit facilities.  Banks must rapidly lend funds at zero cost to companies prepared to save jobs.

As to the general precept I agree that people and businesses need help but Mario is rather hoist by his own petard here. After all he and his colleagues wrote out a prescription of negative interest-rates and wide scale QE. There was some boasting about a Euroboom which quickly faded. Now the Euro area faces the consequences as for example the Euro exchange rate is boosted as carry trades ( to take advantage of negative interest-rates) get reversed.

Meanwhile according to his former colleague Vitor Constancio negative interest-rates are nothing to do with those who voted for them apparently.

You have certainly noticed that market interest rates have been going down for 40 years, well long before CBs were doing QE and buying investment grade bonds.

If so should they hand their salary back?

Let me express my sympathy for those suffering in Italy and elsewhere at this time.

The first business surveys about this economic depression appear

This morning has seen the first actual signals of the scale of the economic slow down going on. One of the problems with official economic data is the  time lag before we get it and this has been exacerbated by the fact that this has been an economic contraction on speed ( LSD). By the time they tell us how bad it has been we may be in quite a different world! It is always a battle between accuracy and timeliness for economic data. Thus eyes will have turned to the business surveys released this morning.

Do ya do ya do ya do ya
Ooh I’m looking for clues
Ooh I’m looking for clues
Ooh I’m looking for clues ( Robert Palmer)

Japan

The main series began in Japan earlier and brace yourselves.

#Japan‘s economic downturn deepens drastically in March, dragged down by a sharp contraction in the service sector, according to #PMI data as #coronavirus outbreak led to plummeting tourism, event cancellations and supply chain disruptions. ( IHS Markit )

The composite output index was at 35.8 which indicates an annualised fall in GDP ( Gross Domestic Product) approaching 8% should it continue. There was a split between manufacturing ( 44.8) and services ( 32.7) but not the way we have got used to. The manufacturing number was the worst since April 2009 and the services one was the worst since the series began in 2007.

France

Next in the series came La Belle France and we needed to brace ourselves even more.

March Flash France PMI suggest GDP is collapsing at an annualised rate approaching double digits, with the Composite Output PMI at an all-time low of 30.2 (51.9 – Feb). Both services and manufacturers recorded extreme drops in output on the month.

There was more to come.

French private sector activity contracted at the
sharpest rate in nearly 22 years of data collection
during March, amid widespread business closures
due to the coronavirus outbreak.

There are obvious fears about employment and hence unemployment.

Amid falling new orders, private sector firms cut
their staff numbers for the first time in nearly threeand-a-half years during March. Moreover, the rate
of reduction was the quickest since April 2013.

I also noted this as I have my concerns about inflation as the Ivory Towers work themselves into deflation mode one more time.

Despite weaker demand conditions, supply
shortages drove input prices higher in March…….with
manufacturers raising output prices for the first time
in three months

We could see disinflation in some areas with sharp inflation in others.

Germany

Next up was Germany and by now investors were in the brace position.

The headline Flash Germany
Composite PMI Output Index plunged from 50.7 in
February to 37.2, its lowest since February 2009.
The preliminary data were based on responses
collected between March 12-23.

This led to this analysis.

“The unprecedented collapse in the PMI
underscores how Germany is headed for recession,
and a steep one at that. The March data are
indicative of GDP falling at a quarterly rate of
around 2%, and the escalation of measures to
contain the virus outbreak mean we should be
braced for the downturn to further intensify in the
second quarter.”

You may be thinking that this is better than the ones above but there is a catch. Regular readers will recall that due to a problem in the way it looks at supply this series has inflated the German manufacturing data. This has happened again.

The headline Flash Germany
Manufacturing PMI sank to 45.7, though it was
supported somewhat by a further increase in
supplier delivery times – the most marked since
July 2018 – and a noticeably slower fall in stocks of
purchases, both linked to supply-side disruption

So the truth is that the German numbers are closer to France once we allow for this. We also see the first signals of trouble in the labour markets.

After increasing – albeit marginally – in each of the
previous four months, employment across
Germany’s private sector returned to contraction in
March. The decline was the steepest since May
2009 and was underpinned by similarly sharp drops
in workforce numbers across both manufacturing
and services.

Also we note a continuing pattern where services are being hit much harder than manufacturing, Of course manufacturing had seen a rough 2019 but services have essentially plunged at a rapid rate.

The Euro Area

We do not get much individual detail but you can see that the other Euro area nations are doing even worse.

The rest of the euro area reported an even
steeper decline than seen in both France and
Germany, led by comfortably the sharpest fall in
service sector activity ever recorded, though
manufacturing output also shrank at the steepest
rate for almost 11 years.

I am trying hard to think of PMI numbers in the 20s I have seen before.

Flash Eurozone Services PMI Activity Index(2)
at 28.4 (52.6 in February). Record low (since
July 1998)

Putting it all together we get this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

The UK

Our numbers turned up to a similar drum beat and bass line.

At 37.1 in March, down from 53.0 in February, the seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – signalled the fastest downturn in private sector business activity since the series began in January 1998. The prior low of 38.1 was seen in November 2008.

This was supported by the manufacturing PMI being at 48 but it looks as though we have at least some of the issues at play in the German number too.

Longer suppliers’ delivery times are typically seen as an
advance indicator of rising demand for raw materials and
therefore have a positive influence on the Manufacturing PMI index.

The numbers added to the household finances one from IHS Markit yesterday.

UK consumers are already feeling the financial pinch of
coronavirus, according to the IHS Markit UK Household Finance Index. With the country on the brink of lockdown during the survey collection dates (12-17 March), surveyed households reported the largest degree of pessimism towards job security in over eight years,
with those employed in entertainment and manufacturing sectors deeming their jobs to be at the most risk.

Comment

So we have the first inklings of what is taking place in the world economy and we can add it to the 40.7 released by Australia yesterday. However we need a note of caution as these numbers have had troubles before and the issue over the treatment of suppliers delivery times is an issue right now. Also it does not appear to matter if your PMI is 30 or 37 we seem to get told this.

The March PMI is indicative of GDP slumping at a
quarterly rate of around 2%,

Now I am slightly exaggerating because they have said 1.5% to 2% for the UK but if we are there then France and the Euro area must be more like 3% and maybe worse if the series is to be consistent.

Next I thought I would give you some number-crunching from Japan.

TOKYO (Reuters) – The Bank of Japan on Tuesday acknowledged unrealized losses of 2-3 trillion yen ($18-$27 billion) on its holdings of exchange-traded funds (ETFs) after a rout in Japanese stock prices, raising the prospect it could post an annual loss this year.

Our To Infinity! And Beyond! Theme has been in play for The Tokyo Whale and the emphasis is mine.

Its stock purchase started at a pace of one trillion yen per year in 2013 when the Nikkei was around 12,000. The buying expanded to 3 trillion yen in 2014 and to 6 trillion yen in 2016, ostensibly to boost economic growth and lift inflation, but many investors view the policy as direct intervention to prop up share prices.

Surely not! But the taxpayer may be about to get a warning of sorts.

The unrealized loss of 2-3 trillion yen would wipe out about 1.7 trillion yen of recurring profits the BOJ is estimated to make this year from interest payments on its massive bond holdings, said Hiroshi Ugai, senior economist at J.P. Morgan.

For today that will be on the back burner as the Nikkei 225 equity index rose 7% to just above 18,000 which means that its purchases of over 200 billion Yen yesterday will be onside at least as we note the “clip size” has nearly trebled for The Tokyo Whale.