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.

Is it to be QE for everyone and everywhere?

It was only yesterday that I signed off with the heat is on and indeed it was. That was true if you looked at the fall in the UK Pound or the Norwegian Krona and even more so with crude oil. In response there was an evening emergency meeting ( by telephone) of the European Central Bank. This was because it had been on the back foot in several of its bond markets in spite of its announcement of more QE ( Quantitative Easing) bond buying as recently as last Thursday. In Italy the benchmark ten-year yield approached 3% and reignited crisis fears. So let us go to the response and the emphasis is mine.

To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.

We know what temporary means as for example the original emergency interest-rate cuts were supposed to be that as was the original QE and negative interest-rates. They are all still here. In a way that is the difference this time around as central bank action is supposed to be reversed a few years later when things are better but that never happened. Instead it is “More! More! More!”

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

Actually they highlight my temporary point because that feels like an end date but later we get this.

The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.

Number-Crunching

There are various perspectives to this as assuming they started immediately which they have then there will now be around 115 billion Euros of QE bond purchases from the ECB. There was also this for Italy.

If capital key is fully respected this means almost 10.5 bln additional monthly purchases of BTPs, for the next 9 months. #BringItON  ( @gusbaratta)

As you can see Gus was enthusiastic. I do not know if he was long the market but anyway it seemed set to offer some relief to hard-pressed Italy.

There was also something that looks set to be significant but has got a little lost in the fog.

To the extent that some self-imposed limits might hamper action that the ECB 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 that we face.

That made me thing of the capital key point made by Gus where purchases are proportionate to each country’s share in the ECB itself, This is mostly but not entirely related to the size of their economy. So clearing the decks in case Italy for example needs more and also at the other end of the scale should they run out of bonds to buy in the Netherlands or Germany.

Also there was a plan for Greece.

A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP.

Rather curiously there are not that many Greek bonds to buy because they have bought so many in the past! The European Stability Mechanism has a very large holding for example.

Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt.

Market Reaction

It seems as though the ECB has steamed in this morning all guns blazing or as they put it.

At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

This has seen the Italian bond future rally over 8 points to 138 as the ten-year yield fell to 1.7%. This is a tactical success although care is needed as only central bankers regard paying much more for something as a success. It should help Italy relax fiscal policy if it is sustained. However, there is a deeper perspective which is that some short of Italian bonds will have been screaming for the financial stretcher-bearers and may not return. Please remember that if down the road we see central bankers and their acolytes complaining of a lack of liquidity.

The situation in equity markets is not so happy because as I type this the Dax of Germany is some 1% lower although the EuroStoxx 50 is hanging onto a few points gain.

The Euro

This is off 1% versus the US Dollar at 1.083 but as we looked at yesterday we are seeing a phase of King Dollar so the picture is blurry. We maybe learn a little that the Euro has slipped against the UK Pound £ but the move is much smaller than its gain yesterday so again we learn not much. So lower yes but we have no way of knowing if the QE has contributed much here in another fail for economics 101.

On that subject someone has announced this morning that they are buying.

The SNB is intervening more strongly in the foreign exchange market to contribute to the stabilisation of
the situation. ( Swiss National Bank)

Australia

It feels like yesterday when the Reserve Bank of Australia announced it might do QE if interest-rates were cut to 0.25%. Well this morning we learnt that beds may be burning in the land of midnight oil.

A reduction in the cash rate target to 0.25 per cent.

Followed by.

A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.

This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow.

As I have pointed out earlier please remember the “market dislocations” bit should liquidity disappear and the RBA complains about it.

Poland

Earlier this week the Polish central bank joined the party.

NBP will also purchase government bonds on the secondary
market as part of the structural operations that change the long-term liquidity structure in the banking sector and contribute to maintaining the liquidity in the government bond secondary market.

Notice how they are getting a liquidity denial in early? Also they did this.

The Council decided to cut the NBP reference rate by 0.5 percentage points, i.e. to 1.00%

Bank of Korea

From Bloomberg.

The Bank of Korea plans to buy $1.2 billion in government bonds to stabilize markets

I would imagine the central banking dark web is full of messages saying “lightweights” after starting with such a small amount.

Comment

When the credit crunch started some central banks sung along with Huey Lewis and te News.

I want a new drug, one that won’t hurt my head
One that won’t make my mouth too dry
Or make my eyes too red

As time has passed more joined in and now the chorus is deafening as more join the QE party. I expect that there will be more in terms of volume for existing players and more new entrants because it is now about oiling the wheels of fiscal policy. When central banks were made “independent” this was not the purpose ( they are not that bright) but the traditional bureaucratic way of appointing people who are to coin a phrase “one of us” means that actually they are doing more than elected politicians would be allowed to. There is a democracy deficit hidden behind the crisis measures.

The picture is complex as there are many areas which badly need help right now. On a personal level in a short space of time I heard about 2 people losing jobs and a business owner losing work. But the history of central bank action is that it favours big not small business or the self employed. One certainty is that once we get any bit of stability the money will pour into the housing market as banks find that easy to do.

Meanwhile we are reminded that mistakes can be very expensive but not for our lords and masters.

Last Thursday: Lagarde says ECB is not there to close bond spreads

Tonight: ECB announces an extra 750 billion of QE to close bond spreads

 

Fiscal Policy will now take centre stage as France has shown

One of our themes is now fully in play. We have observed over the past year or two a shift in establishment thinking towards fiscal policy. This had both bad and good elements. The bad was that it reflected a reality where all the extraordinary monetary policies had proved to be much weaker than the the claims of their supporters and even worse for them were running out of road. The current crisis has reminded us of this as we have had, for example, two emergency moves from the US Federal Reserve already, in its role as a de facto world central bank.

A more positive factor in this has been the change we have been observing in bond yields. We can get a handle on this by looking back at the world’s biggest which is the US Treasury Bond market. Back in the autumn of 2018 when worlds like “normalisation” ans phrases like “Quantitative Tightening” were in vogue the benchmark ten year yield saw peaks around 3.15%. Basically it then spent most of a year halving before rallying back to 1.9% at the end of last year and beginning of this. But this move took place in spite of the fact that we have the Trump Tax Boost which was estimated to have an impact of the order of one trillion US Dollars. I mention this because as well as the obvious another theme was in play which was that the Ivory Towers were wrong-footed yet again. The Congressional Budget Office has had to keep reducing its estimate of debt costs as the rises it expected turned into falls. Also whilst I am on this subject I am not sure this from January is going to turn out so well!

In 2020, inflation-adjusted GDP is projected to grow by 2.2 percent, largely because
of continued strength in consumer spending and a rebound in business fixed investment. Output is
projected to be higher than the economy’s maximum sustainable output this year to a greater degree
than it has been in recent years, leading to higher inflation and interest rates after a period in which
both were low, on average.

Best of luck with that.

Meanwhile we have seen a fair bit of volatility in bond yields but the US ten-year is 0.8% as I type this. Even the long bond ( 30 years) is a relatively mere 1.4%.

Thus borrowing is very cheap and only on Sunday night the US Federal Reserve arrived in town and did its best to keep it so.

 over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.

Step Forwards France

There was an announcement yesterday evening by President Macron which was announced in gushing terms by Faisal Islam of the BBC.

The €300 billion euro fiscal support package announced by Macron for the French economy, to ensure businesses dont go bust and taxes/ charges suspended, is worth about 12% of its GDP – in UK terms that would mean £265 billion…

This morning the French Finance Minster has given some different numbers.

French measures to help companies and employees weather the coronavirus storm will be worth some €45bn, the country’s finance minister Bruno Le Maire said on Tuesday. ( Financial Times)

He went on to give some details of how it would be spent.

He told RTL radio the package of financial aid, which includes payments to temporarily redundant workers and deferments of tax and social security bills, would help “the economy to restart once the corona virus epidemic is behind us”. Previously he had referred to “tens of billions of euros”.

Now let us look at the previous position for France. We had previously note that France was in the middle of a fiscal nudge anyway as the first half of 2019 saw quarterly deficits of 3.2% and 3.1% of GDP respectively, The third quarter was back within the Maastricht rules as it fell to 2.5% of GDP but we still had a boost overall and as you can see below the national debt to GDP ratio went over 100%

At the end of Q3 2019, Maastricht’s debt reached €2,415.1 billion, up €39.6 billion in comparison to Q2 2019. It accounted for 100.4% of gross domestic product (GDP), 0.9 points higher than last quarter. Net public debt increased more moderately (€+15.0 billion) and accounted for 90.3 % of GDP.

Of course debt to GDP numbers have gone out of fashion partly because the “bond vigilantes” so rarely turn up these days. There was a time that a debt to GDP ratio above 100% would have them flying in but they restricted their flying well before the Corona Virus made such a move fashionable. The French ten-year yield is up this morning but at 0.27% is hardly a deterrent in itself to more fiscal action. However whilst it is still as low as it has ever been before this stage of the crisis a thirty-year yield of 0.8% is up a fair bit on the 0.2% we saw only last week. Another factor in play is this.

Third, we decided to add a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes. ( ECB )

Whilst only a proportion of the buying we can expect monthly purchases of French government bonds to rise from the previous 4 billion Euros or so and accordingly the total to push on from 434.4 billion. Also whilst President Lagarde was willing to express a haughty disdain for “bond spreads” I suspect the former French Finance Minister would be charging to the rescue of France if necessary.

One feature of French life is that taxes are relatively high.

The tax-to-GDP ratio varies significantly between Member States, with the highest share of taxes and social
contributions in percentage of GDP in 2018 being recorded in France (48.4%), Belgium (47.2%) and Denmark
(45.9%), followed by Sweden (44.4%), Austria (42.8%), Finland (42.4%) and Italy (42.0%). ( Eurostat )

Short Selling Bans

France along with some other European nations announced short-selling bans this morning which stop investors selling shares they do not own.

#BREAKING French market regulator bans short-selling on 92 stocks: statement ( @afp )

I pointed out that these things have a track record of failure

These sort of things cause a market rally in the short-term but usually wear off in a day or two.

The initial rally to over 4000 on the CAC 40 index soon wore off and we are now unchanged on the day having at one point being 100 points off. Of course some policy work will be writing a paper reminding us of the counterfactual.

Comment

I am expecting a lot more fiscal action in the next few days. The French template is for a move a bit less than 2% of GDP. That will of course rise as GDP falls.

The French government was assuming the economy would shrink about 1 per cent this year, instead of growing more than 1 per cent as previously predicted, Mr Le Maire said. ( Financial Times)

Frankly that looks very optimistic right now. The situation is fast moving as doe example Airbus which only yesterday expected to remain open announced this today.

Following the implementation of new measures in France and Spain to contain the COVID-19 pandemic, Airbus has decided to temporarily pause production and assembly activities at its French and Spanish sites across the Company for the next four days. This will allow sufficient time to implement stringent health and safety conditions in terms of hygiene, cleaning and self-distancing, while improving the efficiency of operations under the new working conditions.

Let me now shift to the other part of the package.

Mr Le Maire said ammunition to prop up the economy also included €300bn of French state guarantees for bank loans to businesses and €1tn of such guarantees from European institutions. ( FT )

The problem is how will this work in practice? The numbers sound grand but for example the Bank of England announced up to £290 billion for SMEs only last week which everyone seems to have forgotten already! One bit that seemed rather devoid of reality to me at the time was this.

The release of the countercyclical capital buffer will support up to £190bn of bank lending to businesses. That is equivalent to 13 times banks’ net lending to businesses in 2019.

Returning to pure fiscal policy I am expecting more of it and would suggest it is aimed at two areas.

  1. Supporting individuals who through not fault of their own have seen incomes plunge and maybe disappear.
  2. Similar for small businesses and indeed larger ones which are considered vital.

Just for clarity that does not mean for banks and the housing market where such monies have a habit of ending up.

Meanwhile a country which badly needs help is still suffering from the “ECB not here to close bond spreads” of Christine Lagarde last week as its ten-year yield has risen to 2.3%. Her open mouth operation has undone a lot of ECB buying.

What can the ECB and European Commission do to help the Euro area economy?

Today our focus switches to the Euro area and the European Central Bank as we await a big set piece event from the ECB. However as is his wont The Donald has rather grabbed the initiative overnight. From the Department of Homeland Security.

(WASHINGTON) Today President Donald J. Trump signed a Presidential Proclamation, which suspends the entry of most foreign nationals who have been in certain European countries at any point during the 14 days prior to their scheduled arrival to the United States. These countries, known as the Schengen Area, include: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland.

I have pointed it out in this manner as sadly the mainstream media is misreporting it with Beth Rigby of Sky News for example tweeting it as Europe. Much of it yes but not all of it. Moving on to our regular economics beat this will impact on an area we looked at back on the 27th of February.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product…… tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents)…..This figure represented 11.7% of GDP, 0.4% more than in 2016.  ( Spain)

Numbers must have been hit already in what is as you can see an important economic area. One sector of this is illustrated by the German airline Lufthansa which has a share price dipping below 9 Euros or down 11% today as opposed to over 15 Euros as recently as the 19th of February. There are the beginnings of an official response as you can see from @LiveSquawk below.

Spanish Foreign Minister Gonzalez: Spain To Special Steps To Support Tourism

I presume the minister means the tourism sector here as there is nothing that can be done about current tourism as quarantines and the like move in exactly the opposite direction.

There is also the specific case of Italy where it is easier now I think to say what is open rather than closed. As the economic numbers will be out of date we can try and get a measure from the stock market. We see that the FTSE MIB index is at 17,000 as I type this as opposed to 25,477 on the 19th of last month. It is of course far from a perfect measure but it is at least timely and we get another hint from the bond market. Here we see for all the talk of yield falls elsewhere the ten-year yield has risen to 1.3% as opposed to the 0.9% it had fallen to. That is a signal that there are fears for how much the economy will shrink and how this will affect debt dynamics albeit we also get a sign of the times that an economic contraction that looks large like this only raises bond yields by a small amount.

Meanwhile actual economic data as just realised was better.

In January 2020 compared with December 2019, seasonally adjusted industrial production rose by 2.3% in the euro area (EA19) and by 2.0% in the EU27, according to estimates from Eurostat, the statistical office of the
European Union. In December 2019, industrial production fell by 1.8% in the euro area and by 1.6% in the EU27.

The accompanying chart shows a pick-up in spite of this also being true.

In January 2020 compared with January 2019, industrial production decreased by 1.9% in the euro area and by
1.5% in the EU27.

The problem is that such numbers now feel like they are from a different economic age.

The Euro

This has been strengthening through this phase as we note that the ECB effective or trade weighted index was 94.9 on the 19th of February and was 98.14 yesterday. So if there is a currency war it is losing.

As to causes I think there is a bit of a Germany effect an the interrelated trade surplus. But the main player seems to be the return of the carry trade as Reuters noted this time last year.

On the other hand, the Japanese yen, Swiss franc and euro tend to be carry traders’ funding currencies of choice, as their low yields make them attractive to sell.

Yields in Switzerland on the benchmark bond return -0.35 percent; in Germany barely 0.07 percent. But the euro has been particularly popular this year as the struggling economy has further delayed policy tightening plans in the bloc.

Of course both Euro interest-rates and yields went lower later in the year as the ECB eased policy yet again. But can you spot the current catch as Reuters continues?

Should U.S. growth deteriorate, international trade conflicts escalate or the end of the decade-long bull run crystallise, the resulting volatility spike can send “safe” currencies such as the yen, euro and Swiss franc shooting higher, while inflicting losses on riskier emerging markets.

Comment

There is quite an economic shock being applied to the Euro area right now and it is currently being headlined by Italy. In terms of a response the Euro area has been quiet so far in terms of action although ECB President Christine Lagarde has undertaken some open-mouth operations.

Lagarde, speaking on a conference call late on Tuesday, warned that without concerted action, Europe risks seeing “a scenario that will remind many of us of the 2008 Great Financial Crisis,” according to a person familiar with her comments. With the right response, the shock will likely prove temporary, she added. ( Bloomberg).

 

I have no idea how she thinks monetary action will help much with a virus pandemic but of course in places she goes ( Greece, Argentina) things often get worse and indeed much worse. She has also rather contradicted herself referring to the great financial crisis because she chose not to coordinate her moves with the US Federal Reserve as happened back then. Also all her hot air contrasts rather with her new status as a committed climate change warrior.

A real problem is the limited room for manoeuvre she has which was deliberate. In my opinion she was given the job and was supposed to have a long honeymoon period because her predecessor Mario Draghi had set policy for the early part of her term. But as so often in life  we are reminded of the Harold MacMillan statement “events, dear boy, events” and now Christine Lagarde has quite a few important decisions to make. Even worse she has limited room. It used to be the case that the two-year yield of Germany was a guide but -1% seems unlikely and instead we may get a frankly ridiculous 0.1% reduction to -0.6% in the Deposit Rate.

The ECB may follow the Bank of England path and go for some credit easing to rev up the housing market, so expect plenty of rhetoric that it will boost smaller businesses. We may see the credit easing TLTRO with a lower interest-rate than the headline to boost the banks ( presented as good for business borrowers).

However the main moves now especially in the Euro area are fiscal even more than elsewhere as the monetary ones have been heavily used. So the ECB could increase its QE purchases to oil that wheel. Eyes may switch to European Commission President Von der Leyen’s statement yesterday.

These will concern in particular how to apply flexibility in the context of the Stability and Growth Pact and on the provision of State Aid.

I expect some action here although it is awkward as again President Von der Leyen had a pretty disastrous term as German Defence Minister. Although not for her, I mean for the German armed forces. So buckle up and let’s cross our fingers.

Also do not forget there may be a knock on effect for interest-rates in Denmark and Switzerland in particular as well as Sweden.

The Investing Channel

Italy faces yet more economic hardship

Italy is the country in Europe that is being most affected by the Corona Virus and according to the Football Italia website is dealing with it in Italian fashion.

In yet another change of plan, it’s reported tomorrow’s Juventus-Milan Coppa Italia semi-final will be called off due to the Corona virus outbreak.

In fact that may just be the start of it.

News agency ANSA claim the Government is considering a suspension of all sporting events in Italy for a month due to the Coronavirus outbreak, as another 27 people died over the last 24 hours.

Thus the sad human cost is being added to by disruption elsewhere which reminds us that only last week we noted that tourism represents about 13% of the Italian economy. Again sticking with recent news there cannot be much demand for Italian cars from China right now.

China has also suffered its biggest monthly drop in car sales ever, in another sign of economic pain.

New auto sales slumped by 80% year-on-year in February, the China Passenger Car Association reports. ( The Guardian )

Actually that,believe it or not is a minor improvement on what it might have been.

Astonishingly, that’s an improvement on the 92% slump recorded in the first two weeks of February. It underlines just how much economic activity has been wiped out by Beijing’s efforts to contain the coronavirus.

Backing this up was a services PMI reading of 26.5 in China and if I recall correctly even Greece only went into the low thirties.

GDP

The outlook here looks grim according to the Confederation of Italian industry.

ITALY‘S BUSINESS LOBBY CONFINDUSTRIA SEES ITALIAN GDP FALLING IN Q1, CONTRACTING MORE STRONGLY IN Q2 DUE TO CORONAVIRUS OUTBREAK ( @DeltaOne )

This comes on the back of this morning’s final report on the last quarter of 2019.

In the fourth quarter of 2019, gross domestic product (GDP), expressed in chain-linked values ​​with reference year 2015, adjusted for calendar effects and seasonally adjusted, decreased by 0.3% compared to the previous quarter and increased by 0.1 % against the fourth quarter of 2018.

That is actually an improvement for the annual picture as it was previously 0% but the follow through for this year is not exactly optimistic.

The carry-over annual GDP growth for 2020 is equal to -0.2%.

That was not the only piece of bad news as the detail of the numbers is even worse than it initially appeared.

Compared to previous quarter, final consumption expenditure decreased by 0.2 per cent, gross fixed capital formation by 0.1 per cent and imports by 1.7 per cent, whereas exports increased by 0.3 per cent.

There is a small positive in exports rising in a trade war but the domestic numbers especially the fall in imports are really rather poor. If you crunch the numbers then the lower level of imports boosted GDP by 0.5% on a quarterly basis.

The long-term chart provided with the data is also rather chilling. It shows an Italian quarterly economic output which peaked at around 453 billion Euros in early 2008 which then fell to around 420 billion. So far so bad, but then it gets worse as Italy has just recorded 430.1 billion so nowhere near a recovery. All these are numbers chain-linked to 2015.

Markit Business Survey

This feels like something from a place far, far away but this is what they have reported this morning.

Italian services firms recorded a further increase in business activity during February, extending the current sequence of growth to nine months. Moreover, the expansion was the quickest since October last year, as order book volumes rose at the fastest rate for four months. Signs of improved demand led firms to take on more staff and job creation accelerated to a moderate pace.

They go further with this.

The Composite Output Index* posted 50.7 in February, up
from 50.4 in January, to signal a back-to-back expansion in
Italian private sector output. The reading signalled a modest monthly increase in business activity.

Mind you even they seem rather unsure about it all.

“Nonetheless, Italian private sector growth remains
historically subdued”

You mean a number which has been “historically subdued” is now a sort of historically subdued squared?

ECB

This is rather stuck between a rock and a hard place. It has already cut interest-rates to -0.5% and is doing some 20 billion Euros of QE bond buying a month. Thus it has little scope to respond which is presumably why there are reports it did not discuss monetary policy on its emergency conference call yesterday. In spite of that there are expectations of a cut to -0.6% at its meeting next week.

Has it come to this? ( The Streets)

As you can see this would be an example of to coin a phrase fiddling while Rome Burns. Does anybody seriously believe a 0.1% interest-rate cut would really make any difference when we have had so many much larger cuts already? Indeed if they do as CNBC has just suggested they will look even sillier as why did they not join the US Federal Reserve yesterday?

ECB and BOE expected to take immediate policy action on coronavirus impact.

Those in charge of the Euro area must so regret leaving the ECB in the hands of two politicians. No doubt it seemed clever at the time with Mario Draghi essentially setting policy for them. But now things have changed.

Fiscal Policy

This is the new toy for central bankers and there is a new Euro area vibe for this.

French Finance Minister Bruno Le Maire says the euro-area must prepare fiscal stimulus to use if the economic situation deteriorates due to the coronavirus outbreak ( Bloomberg)

That is a case of suggesting what you are doing because as we have previously noted France had a fiscal stimulus of around 1% of GDP last year. But of course back when she was the French Finance Minister Christine Lagarde was an enthusiast “shock and awe” for exactly the reverse being applied to Greece and others.

The ECB has already oiled the wheels for some fiscal expansionism by the way its QE bond buying has reduced bond yields. It could expand its monthly purchases again but would run into “trouble,trouble,trouble” in Germany and the Netherlands, pretty quickly.

Comment

If we return to a purely Italian perspective we see some of the policy elements are already in play. For example the ten-year yield is a mere 0.94% although things get more awkward as the period over which it has fallen has also seen a fall in economic growth. The fiscal policy change below is relatively minor.

Italy is planning to hike its 2020 budget deficit target to 2.4% of its GDP from 2.2% to provide the economy with the funds it needs to battle the impact of coronavirus outbreak, Reuters reported on Monday, citing senior officials familiar with the matter.

By contrast according to CNBC the Corona Virus situation continues to deteriorate.

Italy is now the worst-affected country from the coronavirus outside Asia, overtaking Iran in terms of the number of deaths and infections from the virus.

The death toll in Italy jumped to 79 on Tuesday, up from an official total of 52 on Monday. As of Wednesday morning, there are 2,502 cases of the virus in Italy, according to Italian media reports that are updated ahead of the daily official count, published by Italy’s Civil Protection Agency every evening.

Now what about a regular topic the Italian banks? From Axa.

and banks such as Unicredit and Intesa have offered “payment holidays” to some of their affected borrowers.

The ECB is now resorting to echoing Humpty Dumpty

Focus has shifted to the Euro area this week as we see that something of an economic storm is building. For a while now we have seen the impact of the trade war which has reduced the Germany economy to a crawl with economic growth a mere 0.4% over the past year. Then both Italy (0.3%) and France ( 0.1%) saw contractions in the final quarter of 2019. Now in an example of being kicked when you are down one of the worst outbreaks of Corona Virus outside of China is being seen in Italy. Indeed the idea of Austria stopping a train with people from Italy suspected of having the virus posed a question for one of the main tenets of the Euro area as well as reminding of the film The Cassandra Crossing.

Tourism

This is a big deal for Italy as The Local explained last summer.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product.

The food and wine tourism sector continued to be the most profitable of all.

The study’s authors found that “the daily per capita expenditure for a food and wine holiday is in fact in our country is about 117 euros. Meanwhile it was 107 for trips to the mountains and 91 on the coast.”

The numbers were for 2017 and were showing growth but sadly if we look lower on the page we come to a sentence that now rather stands out.

Visitor numbers are only expected to keep growing. Many in the tourism industry predict 2019 will busier than ever in Italy, partly thanks to a growing Chinese tourism market.

Maybe so, but what about 2020? There have to be questions now and Italy is not the only country which does well from tourism.

Tourism plays a major role in the French economy. The accommodation and food  services sector, representing the largest part of the tourism sector, accounts for between
2.5% and 3% of GDP while the knock-on effects of tourism are also felt in other sectors, such as transport and leisure. Consequently, the total amount of internal tourism
consumption, which combines tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents). ( OECD)

Spain

The Gross Domestic Product (GDP) contribution associated with tourism, measured through the total tourist demand, reached 137,020 million euros in 2017. This figure represented 11.7% of GDP, 0.4% more than in 2016. ( INE )

Last summer Kathimerini pointed out that tourism was not only a big part of the Greek economy but was a factor in its recent improvement.

Tourism generates over a quarter of Greece’s gross domestic product, according to data presented on Wednesday by the Institute of the Greek Tourism Confederation (INSETE). The data highlight the industry’s importance to the national economy and employment, as well as tourism’s quasi-monopolistic status in the country’s growth.

According to the latest figures available, at least one percentage point out of the 1.9 points of economic expansion last year came from tourism.

It wondered whether Greece relied on it too much which I suspect many more are worried about today, although fortunately Greece has only had one case of Corona Virus so far. It not only badly needs some good news but deserves it. After all another big sector for it will be affected by wider virus problems.

That also illustrates the country’s great dependence on tourism, as Greece has not developed any other important sector, with the possible exception of shipping, which accounts for about 7 percent of GDP.

Economic Surveys

Italy has released its official version this morning.

As for the business confidence climate, the index (IESI, Istat Economic Sentiment Indicator) improved passing from 99.2 to 99.8.

That for obvious reasons attracts attention and if we look we see there may be a similar problem as we saw on the Markit IHS survey for Germany.

The confidence index in manufacturing increased only just from 100.0 to 100.6. Among the series included
into the definition of the climate, the opinions on order books bettered from -15.5 to -14.3 while the
expectations on production decreased from 5.6 to 4.7

As you can see the expectations  for production have fallen. Perhaps we should note that this index averaged 99.5 in the last quarter of 2019 when the economy shrank by 0.3%

France had something similar yesterday.

In February 2020, households’ confidence in the economic situation has been stable. The synthetic index has stayed at 104, above its long-term average (100).

This continued a theme begun on Tuesday.

In February 2020, the business climate is stable. At 105, the composite indicator, compiled from the answers of business managers in the main market sectors, is still above its long-term mean (100). Compared to January, the business climate has gained one point in retail trade and in services.

Really? This is a long-running set of surveys but we seem to be having a divorce from reality because if we return to household confidence I note that consumption fell in December.

Household consumption expenditure on goods fell in December (–0.3%) but increased over the fourth quarter (+0.4%).

Money Supply

This may give us a little clue to the surveys above. From the ECB earlier.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.9% in January, compared with 8.0% in December.

Whilst the number has dipped recently from the two 8.4% readings we saw in the latter part of 2019 it is much better than the 6.2% recorded last January. So maybe the surveys are in some sense picking an element of that up as the interest-rate cut and recommencement of QE bond buying feeds into the data.

Comment

If we switch to the ECB looking for clues as to what is happening in the economy then I would suggests it discounts heavily what the European Commission has just released.

In February 2020, the Economic Sentiment Indicator (ESI) increased in both the euro area (by 0.9 points to 103.5) and the EU (by 0.5 points to 103.0).

 

 

That does not fit with this at all.

GERMANY’S VDA SAYS CORONAVIRUS IS AFFECTING SUPPLY CHAINS OF CAR MANUFACTURERS AND SUPPLIERS ( @PriapusIQ )

Anyway the newly appointed Isabel Schnabel of the ECB has been speaking today and apparently it is a triumph that its policies have stabilised economic growth somewhere around 0%.

Although the actions of major central banks over the past few years have succeeded in easing financial conditions and thereby stabilising growth and inflation, current and expected inflation rates remain stubbornly below target, in spite of years of exceptional monetary policy support.

Next she sings along with The Chairmen of the Board.

Give me just a little more time
And our love will surely grow
Give me just a little more time
And our love will surely grow

How?

This implies that the medium-term horizon over which the ECB pursues the sustainable alignment of inflation with its aim is considerably longer than in the past.

Another case of To Infinity! And Beyond! Except on this occasion we are addressing time rather than the amount of the operation which no doubt will be along soon enough.

Indeed she echoes Alice in Wonderland with this.

For the ECB, this means that the length of the “medium term” – which is an integral part of its definition of price stability – will vary over time.

Which sounds rather like.

When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Although briefly she seems to have some sort of epiphany.

central banks often have only a limited understanding of the precise configuration of the forces

But it does not last and as ever I expect the result to be even lower interest-rates and more QE as the “lower bound” she mentions gets well er lower again.

Some of this is beyond the ECB’s control as there is not much it can do about a trade war and nothing about a virus outbreak. But by interfering in so many areas it has placed itself in the game and is caught in a trap of its own making. Or returning to The Chairmen of the Board.

There’s no need to act foolishly
If we part our hearts won’t forget it
Years from now we’ll surely regret it

Italy continues to see features of an economic depression

Today gives us an opportunity to compare economic and financial market developments in Italy as this week has brought some which are really rather extraordinary. Let us start with the economics and look at the IMF ( International Monetary Fund ) mission statement yesterday.

Real GDP growth in 2019 is estimated at 0.2 percent, down from a 10-year high of 1.7 percent in 2017.

As you can see they are agreeing with my theme that Italy struggles to sustain any rate of economic growth above 1% per annum. Then they also agree with my “Girlfriend in a Coma” theme as well.

 Real personal incomes remain about 7 percent below the pre-crisis (2007) peak and continue to fall behind euro area peers. Despite record employment rates, unemployment is high at close to 10 percent, with much higher rates in the South and among the youth. Female workforce participation is the lowest in the EU.

The real income situation is particularly damning of the economic position especially if we note that unemployment has continued to be elevated. That brings us back to the economic growth not getting above 1% for long enough for unemployment to fall faster.

What about now?

The IMF has a go at saying things will get better but then lapses into the classic quote of a two-handed economist.

The economic situation is projected to improve modestly but is subject to downside risks.

So let us see if the detail does better than it might go up or down?

Real GDP growth is forecast at ½ percent in 2020 and 0.6-0.7 percent thereafter. These forecasts are the lowest in the EU, reflecting weak potential growth. Materialization of adverse shocks, such as escalating trade tensions, a slowdown in key trading partners or geopolitical events, could lead to a much weaker outlook.

As you can see there is not much growth which frankly in measurement terms would take several years even to cover any margin of error. I also note a rather grim ending as the IMF maybe gives us its true view “could lead to a much weaker outlook.” Another slow down or recession would be a real problem as we note again that real personal incomes are 7% lower than before. If that is/was the peak then how long will this economic depression go on?

The Euro zone

If we look wider for en economic influence the news is not that good either. For example the situation from the overall flash Markit PMI business survey was this.

The ‘flash’ IHS Markit Eurozone Composite PMI®
was unchanged at 50.9 in January, signalling a
further muted increase in activity across the euro
area economy. The rate of expansion has remained
broadly stable since the start of the final quarter of
2019, running at the weakest for around six-and-ahalf years.

If we now move to my signal for near-term economic developments the ECB told us this yesterday.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 8.0% in December from 8.3% in November.

The money supply situation had improved in 2019 but as you can dipped at the end. So the impetus is weaker than it was. In case you are wondering we have seen this before in phases of QE which is currently 20 billion Euros a month and thus boosting the numbers. There are other influences as well.

The broader money supply had a sharper fall and represents the outlook for 2021/22.

The annual growth rate of the broad monetary aggregate M3 decreased to 5.0% in December 2019 from 5.6% in November, averaging 5.4% in the three months up to December.

We will have to see if this is a new development or just a financial market glitch.

The annual growth rate of marketable instruments (M3-M2) was -7.2% in December, compared with -1.1% in November.

Back to Italy

The troubled area across much of the world is the industrial sector and the latest we have on that is this from the Italian statistics office.

The seasonally adjusted volume turnover index (only for the manufacturing sector) remained unchanged
compared to the previous month; the average of the last three months increased by 0.3% compared to
the previous three months. The calendar adjusted volume turnover index increased by 0.2% with respect
to the same month of the previous year. ( November )

This morning there was troubling news for those of us who have noted that employment has often been a leading ( as opposed to the economics 101 view of lagging) indicator in the credit crunch era.

The estimate of employed people decreased (-0.3%, -75 thousand); the employment rate went down to
59.2% (-0.1 percentage points).
The fall of employment concerned both men and women. A rise is observed among 15-24 aged people (+6
thousand), people aged 25-49 decreased (-79 thousand), while people over 50 remained stable.

This meant that if we look for some perspective progress seems to have stopped.

In the fourth quarter 2019, in comparison with the previous one, a slight increase of employment is registered (+0.1%, +13 thousand) and it concerned only women.

We will have to see if that continues as we worry about possible implications for this.

The number of unemployed persons slightly grew (+0.1%, +2 thousand in the last month); the increase
was the result of a growth among men (+2.2%, +28 thousand) and a decrease for women (-2.2%, -27
thousand), and involved people under 50. The unemployment rate remained stable at 9.8%, as also the
youth rate, unchanged at 28.9%.

Italian bond market

If we return to the IMF statement the story starts badly.

 Italy needs credible medium-term consolidation as fiscal space remains at risk.Debt is projected to remain high at close to 135 percent of GDP over the medium term and to increase in the longer term owing to pension spending. If adverse shocks were to materialize, debt would rise sooner and faster.

Somehow in the current economic environment the IMF seems to think that more austerity would be a good idea. Amazing really!

But this week has in fact seen this.

Massive, massive move in #Italy’s 10-year bond yield from 1.44% to 0.95% now. A 50 basis point move in a matter of days party driven by a #Salvini right-wing loss in regional elections. ( @jeroenblokland ) 

These days almost whatever the fiscal arithmetic we see that investors are so desperate for yield they will buy anything and hope the central bank will step up and buy it off them for a profit. Just as a reminder back around 2012 the yield went above 7% on fears the fiscal position suggested Italy was insolvent which of course were self-fulfilling as a yield of 7% made sure it was. But apart from QE what is really different now?

Comment

The depth of the problem is highlighted by this from the IMF.

Steadfast implementation of structural reforms would unlock Italy’s potential and durably improve outcomes. Reforms to liberalize markets and decentralize wage bargaining should be prioritized. They are estimated to yield real income gains of about 6-7 percent of GDP over a decade.

That’s a convenient number isn’t it? But the real issue is that this is a repetition of the remarks at the ECB press conference which are repeated every time. Why? Nothing ever happens.

The longer the economic depression goes on then the demographics become a bigger issue.

The number of births continues to decrease: in 2018, 439,747 children were registered in the General Register Office, over 18,000 less than the previous year and almost 140,000 less than 2008.

The persistent decline in the birthrate has an impact above all on the firstborn children, who decreased to 204,883, 79 thousand less than 2008.

Italy is a lovely country but the economics is an example of keep trying to apply the things that have consistently failed.

The Investing Channel