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

What more can the ECB do for the Euro?

Yesterday in something of a set piece event the new ECB President Christine Lagarde got out her pen to sign some banknotes and in the midst of her soaring rhetoric there were some interesting numbers.

In the euro area, banknotes are used for retail transactions more than any other means of payment. Some 79% of all transactions are carried out using cash, amounting to more than half of the total value of all payments.

So cash may no longer be king but it is still an important part of the Euro area economy. Indeed the numbers below suggest it may be an increasingly important part, perhaps driven by the fact that 0% is indeed better than the -0.5% deposit rate of the ECB.

And since their introduction, the number of euro banknotes in circulation has risen steadily, reflecting both the importance of cash in our economy and the euro’s international appeal. There are now 23 billion euro banknotes in circulation with a value of €1.26 trillion – a third of which are being used outside the euro area.

The latter reflection on use outside the Euro area is a rise because if we look elsewhere on the ECB website we are told this.

It is estimated that, in terms of value, between 20% and 25% of the euro banknotes in circulation are held outside the euro area, mainly in the neighbouring countries. The demand for euro banknotes rose steeply particularly in non-EU countries in eastern Europe when the financial crisis erupted in 2008 and national currencies depreciated against the euro.

We can figure out what was going on there as we recall the carry trade leading to mortgages and business borrowing being undertaken in Euros ( and Swiss Francs) in Eastern Europe. I guess that left some with a taste for the adventures of Stevie V.

Money talks, mmm-hmm-hmm, money talks
Dirty cash I want you, dirty cash I need you, woh-oh
Money talks, money talks
Dirty cash I want you, dirty cash I need you, woh-oh

I am not sure as to why the foreign holdings have risen so much. Some will no doubt cheer lead saying it is a sign of Euro acceptance and strength but there is the issue of notes being potentially used by money launderers and drug smugglers. The ECB is supposed to be against such criminal activity and has used that reason in its ending of production of 500 Euro notes.The circulation of them is in a gentle decline and there are now 458 million of them. The numbers of 200 Euro notes has shot higher as there were 253 million a year ago as opposed to 366 million ( and rising) now.

I did ask the ECB and they pointed me towards this.

Euro cash holdings are widespread in Albania, Croatia, the Czech Republic, the Republic of North Macedonia and Serbia. In those five countries, an average of 36% of respondents reported holding euro cash……..

That still leaves a fair bit unanswered.

Money Supply

There was some good news for the Euro area economic outlook earlier from this.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 8.4% in October from 7.9% in September.

Here we are adding some electronic money to the cash above and we can see that the upwards trend seen in 2019 has been reinstated after last month’s dip. Or if you prefer we have returned to August!

This gives an explanation of how the services sector has held up as the trade war has hit manufacturing. According to the Markit PMI surveys this is especially true in France.

Service sector growth continued to run at one of the highest
recorded over the past year.

The Euro area and the ECB should be grateful for this as according to Matkit even with the monetary growth things in this quarter are weak.

“The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
third quarter.”

If we switch to the longer-term outlook we see this.

The annual growth rate of the broad monetary aggregate M3 stood at 5.6% in October 2019, unchanged from the previous month, averaging 5.6% in the three months up to October.

I think we get the idea that it is 5.6%! Anyway as we know M1 rose the wider sectors must have fallen.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to 0.6% in October from 1.2% in September. The annual growth rate of marketable instruments (M3-M2) was -2.4% in October, compared with -1.1% in September.

The growth rate of 5.6% suggests a better economic outlook for 2021 and head but there is a catch which is this.

 net external assets contributed 3.0 percentage points (up from 2.8 percentage points)

The external influence has been growing over the past year or so and if we subtract it then broad money growth is a mere 2.6% and flashing a warning.

Official Surveys

Today’s releases were upbeat.

In November 2019, the Economic Sentiment Indicator (ESI) increased slightly in both the euro area (by 0.5 points to
101.3) and the EU (by 0.9 points to 100.0)……Amongst the largest euro-area economies, the ESI increased in Spain (+0.7), France and Germany (both by +0.4), while it remained virtually unchanged in Italy (-0.1) and worsened in the Netherlands (−1.0).

However there was another sign of trouble,trouble,trouble for manufacturing.

According to the bi-annual investment survey carried out in October/November this year, real investment in the
manufacturing industry in 2019 is expected to decrease by 2% in both the euro area and the EU. Compared to the
previous survey conducted in March/April this year, this represents a downward revision by 6 and 5 percentage
points for the euro area and the EU, respectively. For 2020, managers expect an increase in real investment by 1%
in both regions.

Care is needed with this series though because if you believed it wholesale Germany would be having a good year economically.

Comment

The ECB finds itself at something of a crossroads.Some elements here are simple as with a weak economy and blow target inflation then its policy easing looks justified.It does not seem to have many monetarists on board but it could easily argue that monetary growth is supporting the economy.

The more difficult elements come from how quickly it had to ease policy again as the ceasefire only lasted around ten months. This then brings into focus the question of why economic growth has been so weak? One way it is trying to answer this is provided by the way it has replaced someone who sometimes behaved like a politician with an actual one which suggests a bigger effort in this area.

“Countries with fiscal space should use it quickly, even more so when they suffer an asymmetric shock like Germany,” Villeroy told the Europlace international forum in Tokyo. “Those with high public debt should make their public finances more growth-friendly. ( Reuters)

Some of this is more French trolling of Germany but France has been more in favour of fiscal policy all along. As a side-effect by providing more bunds for the ECB to buy more fiscal policy from Germany would allow another expansion of monetary policy.

That leaves us with a curiosity that may become the equivalent of a singularity. Central banks have failed in the credit crunch era yet their importance rises and especially in the Euro area they seem to feel it is their role to dictate to politicians,

 

 

 

Trouble is brewing at the ECB

Sometimes what are presented as events in the news cycle that are unrelated are in fact significant. So let me draw to your attention some tweets from Bloomberg yesterday evening.

BREAKING: Sabine Lautenschlaeger resigned from the ECB Executive Board more than 2 years before the official end of her term.

This is a significant event in several ways. Firstly why leave such a prestigious job? Also in the structure of the ECB an executive board member is more powerful than a central bank governor. This is because they vote at every policy meeting whereas central bank governors now rotate For example I quoted from a speech yesterday from the Governor of the Bank of France Francois Villeroy where he declared his views on the recent policy change at the ECB. But whilst he was present at the meeting he did not have a vote. One of the quirks of the 2019 calendar is that the President of the Bundesbank will not be voting at three meetings but the Governor of the Bank of Malta will vote at all but one.

If you think about it the power of the President of the ECB was raised by the rotation of voting rights of central bank Governors as he or as it will soon be she can choose when to bring a vote.

Moving back to Sabine Bloomberg carried on.

MORE: The shock move that comes amid the biggest dissent over monetary policy in Mario Draghi’s tenure. The German policymaker is stepping down on Oct. 31 and the ECB gave no reason for her decision.

Then they tried to put some more meat on that particular bone.

Latest: Sabine Lautenschlaeger’s surprise exit from the ECB follows a trend of early exits by German policy makers. Her move echos the frustrations of the savings-oriented nation with loose policies by the central bank.

Missing from that description is the fact that Sabine will be resigning just as Christine Lagarde starts. I do not know about you but that seems rather significant. Whilst it seems likely that Sabine has not agreed with some and maybe many of the policies of Mario Draghi it is noticeable that she is serving his full term and departing before the arrival of Lagarde. Something that those who have been accusing her of flouncing out of the ECB might do well to consider.

A German Issue

There is of course a long-running one which bond vigilantes on Twitter have highlighted this morning.

Headlines in Munich this morning: German savings banks (Sparkassen) are closing client accounts as they can’t afford to pay interest on them with negative @ecb  rates.

 

Money Supply

These numbers should be welcomed at the Frankfurt towers of the ECB but I suspect it may well follow the phrase used on BBC TV of “look away now”.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 8.4% in August from 7.8% in July.

So my signal for short-term monetary trends is looking stronger which continues the pattern we have seen this year so far. For newer readers narrow money changes tend to impact the economy some 3-6 months ahead. Putting it another way we have gone back to February 2018 as that is when annual growth was last at this level.

If we look back to the “Euro boom” we see that M1 growth peaked at 11.7% in July 2015 as the impacts of large-scale QE and negative interest-rates arrived and then faded away to single digits of 8% and 9%. So we are at the bottom of that range. This of course poses a real question for the change of ECB policy and makes me wonder again about the resignation above.

Broad Money

We saw a similar drumbeat from these numbers earlier.

Annual growth rate of broad monetary aggregate M3, increased to 5.7% in August 2019 from 5.1% in July (revised from 5.2%).

There is a similar pattern here of improving numbers in 2019 and we are quite some distance away from the recent low which was 3.5% in August 2018. But there is a further twist as we note that the number is now higher than at any phase in the “Euro boom” phase.

As to the detail it is M1 dominated as you might expect.

The annual growth rate of the broad monetary aggregate M3 increased to 5.7% in August 2019 from 5.1% in July, averaging 5.1% in the three months up to August. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 8.4% in August from 7.8% in July. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 1.0% in August from 0.1% in July. The annual growth rate of marketable instruments (M3-M2) was -2.9% in August, compared with -1.6% in July.

We have some growth as we move broader but not much and we see that the widest part fell. So there is a fly in the ointment but it is also true that there was a large wadge of ointment this month.

There is another way of looking at the numbers and let me first state that using such analysis in the UK went dreadfully wrong a couple of decades or so ago.

 the annual growth rate of M3 in August 2019 can be broken down as follows: credit to the private sector contributed 3.4 percentage points (up from 3.2 percentage points in July), net external assets contributed 3.0 percentage points (up from 2.9 percentage points), credit to general government contributed -0.2 percentage point (as in the previous month), longer-term financial liabilities contributed -1.0 percentage point (up from -1.1 percentage points), and the remaining counterparts of M3 contributed 0.5 percentage point (up from 0.3 percentage point).

The concern in this area is the contribution of money flows from abroad to the growth seen.

The Euro

This is drifting lower at the moment and is 1.093 versus the US Dollar as I type this. Much of this is a phase of “Holla Dolla(r)” because it has been rising generally but that suits the ECB, Putting it another way there has been very little movement this week versus the UK Pound as I set a benchmark at 1.131 before the Supreme Court decision in the UK as opposed to the 1.126 as I type this.

Comment

When I see the monetary numbers today and think of the recent move by the ECB I am reminded of this from Cypress Hill.

Insane in the membrane
Insane in the brain!
Insane in the membrane
Insane in the brain!

There is a perfectly valid question which goes as follows. Why with money supply growth like this do prospects look so weak? The first part of the answer is that narrow money looks around 6 months ahead and broad 18/24 months ahead so ot is yet to come. The next is that no measure tells us everything and good monetary prospects tell us about domestic inputs and impetus in the Euro area but very little about exports of cars to China for example.Then there is another catch. It is a choice how much notice you take of money supply data but to my mind a central bank must follow it and if it things it is misleading explain why it thinks so? Because we have just seen policies to improve money supply growth when in the case of broad money it is in fact stronger than in the “Euro boom”. The August numbers may be a one month fluke but the trend is not. But as we stand the polices just implemented are pretty much irrelevant for a trade war driven slow down signalled by this from Markit earlier this week.

Flash Eurozone Manufacturing PMI Output
Index(4) at 46.0 (47.9 in August). 81-month low.

So a manufacturer can maybe borrow a bit cheaper which is good in itself but if they still cannot export to China then it is of not much use.

Me on The Investing Channel

The Money Supply trends suggest more weak economic growth for the Euro area and UK

As we move into July we have been provided with a reminder that the effects of the credit crunch are still with us. That is because the benchmark ten-year yield in France closed for the week in negative territory and is 0% as I type this. It is yet another sign of how weak the overall economic recovery has been as we wonder if we are facing another slow down. Such thoughts will have been reinforced by the manufacturing business surveys conducted by Markit as the PMI for Italy has fallen to 48.4 and Spain to 47.9. The latter is significant on three counts as this number had been showing positive growth before a sharp fall this time around. Also overall the Spanish economy has been the best performer of the larger Euro area economies for a while now.

The overall position was disappointing.

Eurozone manufacturing remained stuck firmly in a
steep downturn in June, continuing to contract at
one of the steepest rates seen for over six years. The disappointing survey rounds off a second
quarter in which the average PMI reading was the
lowest since the opening months of 2013,
consistent with the official measure of output falling
at a quarterly rate of approximately 0.7% and acting
as a major drag on GDP.

Money Supply

The downbeat mood created by the news above was not lifted by this from the European Central Bank or ECB.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.2% in May from 7.4% in April.

That means that we have been slip-sliding away from the peak of 7.5% in March. This matters because the narrow money supply has been an accurate signal of economic momentum in the Euro area. In economic theory terms it is a signal of what used to be called excess money balances. If we look for some perspective we see that the more hopeful trend that we had seen in 2019 is fading. As to the overall impulse this rate of growth compares to a peak of 11.7% back in July 2015 In response to the ECB having cut interest-rates into negative territory and pumping up the QE, as from January that year it had begun its first wide-scale program of 60 billion Euros a month.

Indeed of we look back we see some backing for the rumours that the ECB is planning to introduce a new round of QE. That is because we step back in time to January 2015 M1 growth was 6.9% which is not that different to the 7.2% and falling we are seeing now.

Broad Money

This has a different impact to the above which operates about 3 months or so ahead. Broad money growth takes around two years to fully impact which is why central banks target consumer inflation two years ahead. Here is the latest data.

Annual growth rate of broad monetary aggregate M3, stood at 4.8% in May 2019, after 4.7% in April 2019

The picture here is brighter as it has been pretty consistent growth since the nadir of 3.5% in August last year. The catch is that as it is split between growth and inflation we are never really sure what the mix between the two will be. Also if we look at the counterparts breakdown we see that the domestic parts are weak.

credit to the private sector contributed 2.8 percentage points (down from 3.0 percentage points in April),,,,,,,,,,, credit to general government contributed 0.2 percentage point (down from 0.5 percentage point)

In case you are wondering what made it grow it was rather off message as it may well have been the often maligned evil foreign speculators.

net external assets contributed 2.4 percentage points (up from 1.6 percentage points),

I jest slightly but you get the idea.

The UK

The troubling theme continued with the UK data which followed some 30 minutes later. The rate of M4 Lending growth went from 4.1% in April to 3.8% in May and as we do not get narrow money data in the UK it has been the best guide we get. In the detail there was maybe some hope as household money holdings rose.

The total amount of money held by UK households, private non-financial corporations (PNFCs) and non-intermediary other financial corporations (NIOFCs) (broad money or M4ex) increased by £2.9 billion in May (Chart 3). Within this, households’ money holdings increased by £6.5 billion, the largest increase since September 2016. The strength on the month was due to increased flows into non-interest-bearing deposit accounts.

If we switch to the credit side of the ledger then there has been something of a change.

The extra amount borrowed by consumers to buy goods and services was £0.8 billion in May, broadly in line with the £0.9 billion average since July 2018. Within this, additional borrowing for other loans and advances fell on the month to £0.5 billion, and credit card lending increased to £0.3 billion.

The annual growth rate of consumer credit slowed further in May, to 5.6%, reflecting the weaker lending flows seen over most of the past year. This was the lowest since April 2014, and well below the peak of 10.9% in November 2016.

If we just look at the pure data then whilst it is not put this way we seem to be seeing another sign of the slow down in the car market. I would expect that to be the main cause in the fall in other loans and advances and regular readers will recall that a couple of months or so ago the Bank of England explicitly mentioned this.

Moving to the trend it continues to slow albeit that at 5.6% the annual rate of growth is still far higher than anything else in the UK economy at more than triple the rate of economic growth and a bit less than double wage growth. Of course you can take an alternative view as the Bank of England called 8.3% growth slow and assured us only last week that debt has not been a driving force in the UK economic recovery. As she was a success a Glastonbury who better than Kylie to offer a critique of this?

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

Comment

The monetary impulses in the Euro area and the UK are losing momentum which posts a cloud over economic prospects for the rest of 2019. The end of the world as we know it? No, but a weak growth impulse as we wonder if the opening quarter was as good as it gets for this year.

Meanwhile there was some brighter news from two bits of data from the Euro area earlier. From @LiveSquawk

Eurozone Unemployment Rate (May): 7.5% (est 7.6%, prev 7.6%) – Lowest Since July 2008……Italy Unemployment Rate (MayP): 9.9% (est 10.3%, prevR 10.1%)

The catch is that these are lagging indicators and represent more the growth of 2017 and the first part of last year.

Also let me give you some number crunching from the UK. Remember the Funding for Lending Scheme which started 7 years ago to boost business lending to smaller businesses. Well lending to what are called SMEs is now £166.3 billion whereas unsecured credit rushed past it to £217.3 billion. Or if you prefer monthly growth £0.2 billion for the former and £0.9 billion for the latter. So the reality is pretty much the opposite of the hype.

Podcast

Just a reminder that this is also on I-Tunes as Notayesmanspodcasts for those who listen to them via that source.

 

 

Better economic prospects for the Euro area come with ever more negative bond yields

There is plenty of economic news out of the Euro area for us to chew on and as ever we will ignore the politics, unless it directly affects the economics as looks like will happen in Italy and may do so in Greece. But let me open with not a new development but a continuation of something we looked at back on the 9th of April and 27th of March, as we considered how permanent a feature negative interest-rates will be and whether people will continue to be paid to issue debt?

Maintaining Low Interest Rate Environment Is Completely Justified And Necessary In Light Of Economic Situation ( @LiveSquawk )

That is from ECB Governing Council Member Francois Villeroy who is also Governor of the Bank of France who has been speaking this morning. As you can see he has no plans for changes as we note we can expect more of this and in fact so much so that we got an attempt at deflection from him as we continue the @LiveSquawk updates.

ECB’s Villeroy: ECB Needs Time To Assess Impact Of Negative Rates

Seeing as they started around five years ago that is a bit rich to say the least! It was on the 11th of June 2014 that the Deposit rate was cut to -0.1% and it was subsequently reduced to the current -0.4%. Also it contradicts what ECB President Mario Draghi has been telling us as on more than one ocassion he has claimed that a combination of ECB negative interest-rates and QE has added around 1.5% to Euro area GDP. This is a common event these days where central bankers are happy to bask in any favourable news but then deflect any problems elsewhere. Or if you prefer they behave like politicians.

The Banks

No doubt the Governor of the Bank of France was pleased he could quickly move on from the wider economy and get onto what really concerns a central banker which is the banks.

ECB’s Villeroy: Monetary Policy Also Has Favourable Effect For Banks

It often gets forgotten now but the large interest-rate cuts benefited the banks via the way that mortgage interest-rates were then cut. Also they benefited via their holdings of bonds from the sovereign and corporate QE. Also as those policies continued they boosted house prices as highlighted by the numbers from Eurostat below.

House prices rose by 4.2% in both the euro area and the EU in the fourth quarter of 2018 compared with the same quarter of the previous year.

As a broad sweep house prices started rising in the spring of 2015 and from 98 then have risen to 114 now.

And yet there is still as Taylor Swift would say “trouble,trouble,trouble” for banks.

ECB’s Villeroy: Impact Of Low Interest Rate On Banks Should Neither Be Ignored Nor Blown Out Of Proportion.

Okay but there was more.

ECB’s Villeroy: Main Prerequisite For Banks To Improve Profitability Is For Them To Put In Place Restructuring Strategies

Good luck with that as after all if that was what was happening we would hardly be here would we? The totem pole for banking in the Euro area is of course Deutsche Bank and this morning we see its share price is falling again ( 1%) to 6.37 Euros which compares to more like 13 Euros when the ECB began its negative interest-rate policy which speaks for itself.

That leads us into the current trap that banking often finds itself in the Euro area. The banks need more capital but the share price makes that expensive, especially for shareholders who have had to dip into their wallets and purses before.

Money Supply

The last couple of months have seen the money supply data turn into a bright spot for the Euro area economy. So let us get straight to the narrow money data which has worked so well as an indicator of economic prospects.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.4% in April, compared with 7.5% in March.

So not quite as improved as March but still an improvement overall. This is because the annual rate of growth fell to 6.2% in January after a generally declining sequence below 7% in the latter part of last year. Or if you prefer we are back to similar levels to last summer. Therefore I continue to expect Euro area economic growth to be of the order of the 0.4% we saw in the first quarter. The challenge to that comes from the external environment such as the trade wars and should we see a continuation of the weaker money supply data from the US.

We can now look at the impact of QE and negative interest-rates on the narrow money supply and see that it raised the annual rate of growth from about 5% to 11.7% quite quickly. As the money supply grew then rates of growth were likely to fall but we did see 9.7% in September 2017. Interestingly money supply growth seems to have been affected more by the reduction in QE than its end. Maybe that is because whilst the new purchases have stopped it is mot maturing and reinvestment is then taking place. For example this totalled 23.4 billion Euros in April.

Looking Further Ahead

The outlook a couple of years ahead continues to improve a little.

Annual growth rate of broad monetary aggregate M3 stood at 4.7% in April 2019, after 4.6% in March (revised from 4.5%)

We know that narrow money headed the opposite way leaving us noting quite a compositional change taking place.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 0.5% in April from -0.2% in March. The annual growth rate of marketable instruments (M3-M2) was -5.9% in April, compared with -5.7% in March.

There is also a structural breakdown of the supply side but that is unreliable and in the case of my home country the UK relying on it was a failure. So we are left with the view that two years ahead there will be an uptick but the catch is that it might be as much in inflation as in growth. For example it might follow the Iron Ore price which hit a six-year record in Australian Dollars earlier today.

Comment

The improvement we have been seeing in the money supply data seems now to be feeding into the official sentiment indicator.

In May 2019, the Economic Sentiment Indicator (ESI) increased in the euro area (by 1.2 points to 105.1)…..Industry confidence booked the first solid improvement (+1.4) in thirteen months, thanks to the sharpest increase in managers’ production expectations in 6 ½ years, as well as more favourable assessments of the stocks of finished products………..Consumer confidence firmed (+0.8), propelled by households’ brighter
expectations about the general economic situation,

This makes me look again at the remarks by the Governor of the Bank of France who seems to be preparing us for a continuation of the negative interest-rate policy or NIRP. As overall economic prospects have improved we have seen more negative bond yields rather than less as the biggest three Euro area economies ( Germany, France and Spain ) all have negative two year yields and only Spain’s 0.05% stops them have negative five-year yields as well. We only stop at the fourth largest economy because it is the special case called Italy where bond yields are rising again.

So here we are again listening to Coldplay.

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

Podcast

This week on the trend for mortgage rates which as it happens applies to the Euro area as well as the UK.

 

 

 

Why I am expecting a rise in Euro area economic activity

One of the fun parts of being a Notayesman is that such a mindset gives the ability to quickly get on the pace with potential changes in trend. This morning what has been our most reliable indicator over the past couple of years looks like it is providing such an opportunity so let us get straight to it.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 7.4% in March from 6.6% in February. ( European Central Bank or ECB).

This adds to what I reported on the 28th of last month.

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

 

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

As you can see the annual growth rate has now picked up quite a bit as we start our money supply journey in 2019. In isolation this indicates a strengthening of the Euro area economy and returning to my opening theme this represents a change on a consensus which has in many cases only just caught up with our previous narrow money supply trend which led to the Euro area economy singing along with Alicia Keys.

Oh, baby
I, I, I, I’m fallin’
I, I, I, I’m fallin’
Fall

Whereas now we have an indicator that there are better prospects for the summer as narrow money supply data looks around 3 months or so ahead. For those of you wondering how this works? The mechanisms here were described by Anna Schwartz some years back.

Because money is used in virtually all economic transactions, it has a powerful effect on economic activity. An increase in the supply of money puts more money in the hands of consumers, making them feel wealthier, thus stimulating increased spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods.

In my view this works best for narrower measures of the money supply because as she points out it is.

M1, a narrow measure of money’s function as a medium of exchange;

In general it gets spent and boosts nominal GDP. As to the real GDP we really want that tends to go with it unless there is big shift in inflation prospects. That is less likely to happen when we have a shorter time span.

Some Perspective

If we look back on the data we see an annual rate of growth which was last at this level in June last year. Up to then it had been falling from the 9.7% of September 2017. So if sustained we have regained about a third of the decline.

War on Cash

With there being an apparent turn for the better in the narrow money supply this may prove to be a bit like of on the cunning plans of Baldrick from the TV series Blackadder. From Carolyn Look of Bloomberg on Friday.

Fun fact: today was the last day Germany & Austria issued the €500 note. All other € countries stopped in January. Us Germans need a little more time to say goodbye when it comes to cash (but don’t worry, you can still use the ones that are circulating).

Whether that will be something of a brake on the money supply only time will tell, But the official theme that this is to combat money laundering has been torpedoed by the reality of the enormous scale of such activity in the banking sector of the Baltics. As ever no-one is suggesting that part of “the precious” needs eliminating nor are those banks being called “Bin Ladens” as the notes once were.

Broad Money

This too has picked up but March had a disappointing kicker which is explained if we go straight to the detail.

Looking at the components contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 4.9 percentage points (up from 4.3 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed -0.1 percentage point (as in the previous month) and marketable instruments (M3-M2) contributed -0.3 percentage point (down from 0.0 percentage point).

The broader elements of the money supply shrank with a small reduction as we move to M2 but a 0.3% one if we move to M3. The latter matters because if we move from the ECB description to the real impact we are looking at a view on bank lending and its prospects.

Thus more of this seems to be on the cards.

 Among the borrowing sectors, the annual growth rate of adjusted loans to households stood at 3.2% in March, compared with 3.3% in February, while the annual growth rate of adjusted loans to non-financial corporations decreased to 3.5% in March from 3.8% in February.

As you can see this weakened although to my mind this is usually a lagging indicator for economic activity which for a while has been reflecting the better economic growth of this time last year.

Comment

The obvious question is how much of a pick-up in economic activity is on the cards. We have just seen quarterly economic growth of 0.1% followed by 0.2% on the one hand which was quite a drop on the 0.7% of 2017. But a rally to a period of 0.3%/0.4% in terms of quarterly growth looks on the cards. We can look at that in two ways and the opening view is that it is an improvement. Ironically it is the ECB itself that undercuts this with its view.

In our latest staff projections, the euro area growth outlook for 2019 has been revised down substantially, to an annual growth rate of 1.1%.

Also in line with other central banks it thinks that an annual growth rate of 1.5% is as good as it now gets. I am not sure how that works with the US reporting an annualised growth rate of 3.2% as it did in Friday but Ivory Towers are seldom bothered by such matters.

Looking more specifically we can expect a boost for the Euro area domestic economies as we wait to see what happens on the trade front. To my mind this morning’s surveys for the Euro area mostly reflect the difficult period we have just seen.

Euro area economic confidence falls to its weakest level since September 2016. ( @forexlive)

Another way of looking at it can be provided by services doing okay whilst manufacturing which relies on exports is not doing okay.

Adding to the more upbeat theme is the way the Euro has been depreciating. It rather conveniently went to 100 at the end of September in trade-weighted terms or as Maxine Nightingale sang.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from
Love is good, love can be strong
We gotta get right back to where started from
A ha

It is now 96.5 which is certainly the equivalent of a 0.25% interest-rate cut and maybe a bit more.

My Podcast on QE

 

 

 

 

 

The economic outlook for the Euro area looks even weaker

Today brings the economy of the Euro area into focus and to my mind yesterday brought us something to consider so let me hand you over to Statistics Netherlands.

In January 2019, prices of owner-occupied dwellings (excluding new constructions) were on average 8.7 percent higher than in the same month last year. The price increase was somewhat higher than in December 2018. This is evident from price monitoring of existing owner-occupied dwellings by Statistics Netherlands (CBS) and The Netherlands’ Cadastre, Land Registry and Mapping Agency.

This is a very familiar theme as we find that the era of low and in this instance negative interest-rates and QE bond purchases leads to higher house prices. We have looked at house prices in the Netherlands regularly over the credit crunch era so let us remind ourselves of the full scope and the emphasis is mine.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then. In May 2018, the price index of owner-occupied dwellings exceeded the record level of August 2008 for the first time. In January 2019, house prices reached the highest level ever.

Compared to the low in June 2013, house prices were up by almost 36 percent on average in January 2019, and 6.5 percent higher on average relative to the previous peak in August 2008.

There are various issues to consider here of which the first is simply timing. Different central banks responded in different ways to the credit crunch but house prices turning in the summer of 2013 is a rather familiar message. Also we note that the turn in house prices was driven by credit easing policies at this point as large-scale QE had not yet begun. From December 2011.

To conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year.

They amounted to around one trillion Euros and slowly we see in this instance the Netherlands housing market began to sing along with George Benson.

Turn your love around
Don’t you turn me down
I can show you how
Turn your love around

Why do central bankers love this? A speech from Peter Praet of the ECB last week gave us the two main reasons and he opened with the wealth effects.

Residential real estate (RRE) is the main component of euro area household wealth. Housing accounts for around 50% of asset holdings[2] and is largely financed through borrowing, with mortgages making up 85% of household liabilities

Then the fact that it supports “the precious”.

The corollary is a tight linkage between RRE prices and the balance sheets of the euro area banking sector. Mortgage loans account for between 40% and 90% of total lending by euro area banks to households across EU countries.

One way of looking at the problems of the Italian is to note that the balance sheets of the banks have not been helped by higher house prices for their mortgage balance sheets and troublingly in fact it is getting worse.

According to preliminary estimates, in the third quarter of 2018 the House Price Index (see Italian IPAB) decreased by 0.8% compared with both the previous quarter and the same quarter of the previous year (on annual basis it was -0.4% in the second quarter).

The linkage to the real economy was also provided by Peter Praet and at the moment he will be thinking of the positives in spite of the fact he looked at it in reverse here.

Falls in prices therefore affect the euro area business cycle through two main channels. First, by reducing households’ net wealth, which has decelerator effects on consumption[3], and weakening banks’ balance sheets through the decline in collateral and property values (the asset valuation channel); and second, by increasing the riskiness of households and of construction firms, prompting banks to tighten their lending standards (the credit risk channel).

Overall I guess he will be happy with this.

House prices rose by 4.3% in both the euro area and the EU in the third quarter of 2018 compared with the same quarter of the previous year.

This compares to a current consumer inflation rate of the order of 2.1% back then which does not seem to include house prices, can anybody think why? Let me help out by suggesting in central banker terms at least the other around 2% is wealth effects.

Returning to the monetary analysis theme and looking at the path of narrow and broad money growth it looks as though house prices move with broad money growth which is logical with the role of mortgage lending in overall bank lending. House prices may even move first perhaps in anticipation of policy moves as we have seen with bond yields and exchange rates.

Money Supply Trends

We have got used to falling numbers and today was no exception.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 6.2% in January from 6.6% in December…….annual growth rate of broad monetary aggregate M3 decreased to 3.8% in January 2019 from 4.1% in December 2018.

If we look at this as a broad sweep then M1 growth has fallen substantially from the 11.7% per annum peak of the summer of 2015 and the bounce to 9.7% in late 2017. Much of this has been a deliberate policy with the monthly QE tap having been reduced and then finally closed at the end of 2018. This has had an impact on the broader measure as well which has also been weakened by this.

The annual growth rate of short-term deposits other than overnight deposits (M2-M1) stood at -0.8% in January, unchanged from the previous month. The annual growth rate of marketable instruments (M3-M2) decreased to 0.4% in January from 0.9% in December.

Putting it another way M3 would be growing at an annual rate of 4% if only M1 was a factor and the wider measures reduced the annual rate of growth by 0.2%.

Comment

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous. A little relief comes from the fact that inflation has fallen although that may change as we note the recent rises in the oil price. Thus it looks like more of the same weak trend in the early part of 2018.

The broad money measure has declined but in proportionate terms by much less or to put it another way this is mostly the result of the end of QE. This poses a problem as we are reminded of the words of Mario Draghi.

certainly especially in some parts of this period of time, QE has been the only driver of this recovery.

Now we see that as it has ended in terms of monthly flow economic growth in the Euro area has slowed to a crawl. Whether it will slow further I do not know but we seem set for more weak growth in the early part of this year.

Meanwhile some have claimed that bank lending growth is supporting things as opposed to my view that it is a lagging indicator and has been representing the better times seen in 2017. I guess they will be quieter today as even lagging indicators work over time.

Annual growth rate of adjusted loans to non-financial corporations decreased to 3.3% in January from 3.9% in December.

Returning to my opening theme unless there is a change the outlook for house prices in the Euro area looks set for a turn.