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

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

Lagarde reaffirms that government debt will eventually have to be repaid

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

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

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

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

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

Also there has been this.

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

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

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

Money Supply

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

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

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

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

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

Indeed it is mostly a narrow money thing.

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

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

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

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

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

Grandstanding?

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

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

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

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

Although there is no real link at all to this.

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

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

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

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

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

Comment

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

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

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

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

The regulators are now on the case but.

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

Where will all the extra US Money Supply end up?

Today brings both the US economy and monetary policy centre stage. The OECD has already weighed in on the subject this morning.

The COVID-19 outbreak has brought the longest economic expansion on record to a juddering halt. GDP
contracted by 5% in the first quarter at an annualised rate, and the unemployment rate has risen
precipitously. If there is another virus outbreak later in the year, GDP is expected to fall by over 8% in 2020
(the double-hit scenario). If, on the other hand, the virus outbreak subsides by the summer and further
lockdowns are avoided (the single-hit scenario), the impact on annual growth is estimated to be a percentage
point less.

Actually that is less than its view of many other countries. But of course we need to remind ourselves that the OECD is not a particularly good forecaster. Also we find that the official data has its quirks.

Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent, the U.S. Bureau of Labor Statistics reported today……In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment
in government continued to decline sharply……….The unemployment rate declined by 1.4 percentage points to 13.3 percent in May, and the number of unemployed persons fell by 2.1 million to 21.0 million.

Those figures not only completely wrong footed the forecasters they nutmegged them as well in one of the most spectacular examples of this genre I have seen. I forget now if they were expecting a rise in unemployment of eight or nine million but either way you get the gist. We do not know where we are let alone where we are going although the Bureau of Labor Statistics did try to add some clarity.

If the workers who were recorded as employed but absent from work due to “other  reasons” (over and above the number absent for other reasons in a typical May) had
been classified as unemployed on temporary layoff, the overall unemployment rate  would have been about 3 percentage points higher than reported (on a not seasonally  adjusted basis).

We learn more about the state of play from the New York Federal Reserve.

The New York Fed Staff Nowcast stands at -25.5% for 2020:Q2 and -12.0% for 2020:Q3. News from this week’s data releases increased the nowcast for 2020:Q2 by 10 percentage points and increased the nowcast for 2020:Q3 by 24.5 percentage points. Positive surprises from labor, survey, and international trade data drove most of the increase.

As you can see the labo(u)r market data blew their forecasts like a gale and leave us essentially with the view that there has been a large contraction but also a wide possible and indeed probable error range.

The Inflation Problem

We get the latest inflation data later after I publish this piece. But there is a problem with the mantra we are being told which is that there is no inflation. Something similar to the April reading of 0.3% is expected. So if we switch to the measure used by the US Federal Reserve which is based on Personal Consumption Expenditures the annual rate if we use our rule of thumb would in fact be slightly negative right now. On this basis Chair Powell and much of the media can say that all the monetary easing is justified.

But there are more than a few catches which change the picture. Let me start with the issues I raised concerning the Euro area yesterday where the numbers will be pushed downwards by a combination of the weights being (very) wrong, many prices being unavailable and the switch to online prices. It would seem that the ordinary person has been figuring this out for themselves.

The May 2020 Survey of Consumer Expectations shows small signs of improvement in households’ expectations compared to April. Median inflation expectations increased by 0.4 percentage point at the one-year horizon to 3.0 percent, and were unchanged at the three-year horizon at 2.6 percent. ( NY Fed Research from Monday)

It is revealing that they describe an increase in inflation that is already above target as an “improvement” is it not? But we see a complete shift as we leave the Ivory Towers and media palaces as the ordinary person surveyed expects a very different picture. Still the Ivory Towers can take some solace from the fact that inflation is in what they consider to be non-core areas.

Expected year-ahead changes in both food and gasoline prices displayed sharp increases for the second consecutive month and recorded series’ highs in May at 8.7% and 7.8%, respectively, in May.

Just for the avoidance of doubt I have turned my Irony meter beyond even the “turn up to 11” of the film Spinal Tap.

Central bankers will derive some cheer from the apparent improvement in perceptions about the housing market.

Median home price change expectations recovered slightly from its series’ low of 0% reached in April to 0.6% in May. The slight increase was driven by respondents who live in the West and Northeast Census regions.

Credit

More food for thought is provided in this area. If we switch to US Federal Reserve policy Chair Jerome Powell will tell us later that the taps are open and credit is flowing. But those surveyed have different ideas it would seem.

Perceptions of credit access compared to a year ago deteriorated for the third consecutive month, with 49.6% of respondents reporting credit to be harder to get today than a year ago (versus 32.1% in March and 48.0% in April). Expectations for year-ahead credit availability also worsened, with fewer respondents expecting credit will become easier to obtain.

Comment

I now want to shift to a subject which is not getting the attention it deserves. This is the growth in the money supply where the three monthly average for the narrow measure M1 has increased in annualised terms by 67.2% in the three months to the 25th of May. Putting that another way it has gone from a bit over US $4 trillion to over US $5 trillion over the past 3 months. That gives the monetary system quite a short-term shove the size of which we can put into context with this.

In April 2008, M1 was approximately $1.4 trillion, more than half of which consisted of currency.  ( NY Fed)

Contrary to what we keep being told about the decline of cash it has grown quite a bit over this period as there is presently a bit over US $1.8 trillion in circulation.

Moving to the wider measure M2 we see a similar picture where the most recent three months measured grew by 40.6% compared to its predecessor in annualised terms. Or if you prefer it has risen from US $15.6 billion to US $18.1 billion. Again here is the historical perspective from April 2008.

 M2 was approximately $7.7 trillion and largely consisted of savings deposits.

So here is a question for readers, where do you think all this money will go? Whilst you do so you might like to note this from the 2008 report I have quoted.

While as much as two-thirds of U.S. currency in circulation may be held outside the United States….

The Investing Channel

 

The blue touch paper has been lit on the Money Supply boom of 2020

Today as I shall explain later is a case of back to the future especially for me. It brings an opportunity to examine one of the economic features of the current Covid-19 pandemic. This is a surge in money supply growth which has been quite something such that I think we will look back and consider it to be unprecedented. I expect that to be true in absolute terms in many places and it is already being true in relative terms in many.

The Euro Area

This morning has brought another signal of this so let us go straight to the ECB data.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March.

Previously we had eight months of growth of ~8% so as you can see going to 10.4% and then 11.9% shows that the accelerator has been pressed hard and maybe the pedal has been pushed to the metal. If we switch to the cause of this which is mostly the rate of QE purchases by the ECB well you can see below. Apologies for the alphabeti spaghetti.

ECB PSPP (EUR): +9.545B To 2.216T (prev +10.936B To 2.207T) –

CSPP: +1.181B To 213.147B (prev +2.324B To 211.966B) – CBPP: +1.028B To 280.778B (prev +1.030B To 279.750B) – ABSPP: -377M To 30.738B (prev +161M To 31.115B) –

PEPP: +30.072B To 211.858B (prev +28.878B To 181.786B) ( @LiveSquawk) ( B= Billion and T=Trillion )

These are the weekly increases and if we stick to the money supply we see that in one week alone some 42 billion Euros of QE took place which means that on the other side of the ledger the narrow money supply has been increased by the same amount. Some of this was previously taking place and the more recent boost is called PEPP and is of the order of 30 billion Euros a week.

What this means is that the total amount of narrow money has gone from just under 9 trillion Euros in January to just over 9.5 trillion in April and will be going past 10 trillion fairly soon ( at the current pace in July).

Tucked away in the detail is that people have been wanting cash as well. The amount in circulation rose by 25.6 billion Euros in March and by 15.1 billion in April. Only a couple of months but that represents a clear shift of gear as we note April was the same as the whole of the third quarter last year and 2020 so far has already exceeded 2019.

Broad Money

This is a case of the same old song.

Annual growth rate of broad >monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March.

The pick-up in annual growth is of the order of 3% and this is the highest growth rate for nearly 12 years, well until next month anyway! Switching to totals it is now 13.6 trillion Euros.

The breakdown is rather revealing I think.

The annual growth rate of the broad monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March, averaging 7.1% in the three months up to April. 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 11.9% in April from 10.4% in March. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to -0.3% in April from 0.0% in March, while the annual growth rate of marketable instruments (M3-M2) decreased to 6.7% in April from 10.1% in March.

This tells us a couple of things. The opener is that the expansion is a narrow money thing and in fact narrow money over explains it. That means that in terms of wider bank intermediation there was a credit contraction here as we shift from M1 to M3 via M2.

Also at first it looks like the rate of deposits from businesses has picked up but then we see it seems to be insurance companies and pension funds. Or if you prefer the ECB has just bought a load of bonds off them and they have deposited the cash for now.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 6.7% in April from 6.0% in March, while the annual growth rate of deposits placed by non-financial corporations increased to 13.7% in April from 9.7% in March. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 12.3% in April from 16.9% in March.

Although that might seem obvious we have seen stages where it has not appeared to be true.

Credit

The credit punch bowl has been out too.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 4.9% in April 2020 from 3.6% in the previous month. The annual growth rate of credit to general government increased to 6.2% in April from 1.6% in March, while the annual growth rate of credit to the private sector increased to 4.4% in April from 4.2% in March.

The main thing of note here is the surge in credit given to governments which links to the increases in public expenditure we have seen. There has been quite a swing here as it was negative ( -2%) as recently as February and had been negative for 9 months. So the Stability and Growth Pact was applied and then abandoned.

Looking at the breakdown the fall in loans to households is presumably a decline in mortgage lending and I think you can all figure out why companies were borrowing more.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) stood at 4.9% in April, compared with 5.0% in March. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.0% in April from 3.4% in March, while the annual growth rate of adjusted loans to non-financial corporations increased to 6.6% in April from 5.5% in March.

@fwred of Bank Pictet has got his microscope out.

Wow, another massive increase in bank loans / credit lines to euro area corporates, up €73bn in April following €121bn in March (both the largest on record by a huge margin)…….Finally, the surge in bank loans in March-April was broad-based across countries. No one left behind.

His Euro area glass is always full so let me point out that there are times when companies are borrowing to invest (good) and times they are borrowing because they are in trouble.

Also he has been kind enough to illustrate one of my main themes so thank you Fred and the emphasis is mine

Euro area corporates are drawing on their credit lines and taking new bank loans like there *is* tomorrow.

Side-effect: most banks will easily qualify for the lowest TLTRO-III rate from June (-1%).

What a coincidence!

Comment

This is an example in a way of the circle of life as back in the day I got a job because as a graduate monetary economist City firms wanted people to look at the money supply. Although there was a difference in that the central banks and governments were trying to bring it down as opposed to pumping it up. Rather ominously it did not work as planned and sometimes did not work at all.

How should it work? In essence the extra money balances (narrow money) should be spent relatively quickly and thereby give the economy a boost. That is why I look at narrow money and as an indicator it has worked pretty well. The catch or “rub” as Shakespeare would put it is velocity or how quickly the money circulates and there we have a problem as it is hard to measure especially right now. We know that for a while it will have been extremely low because in many areas you simply cannot spend money at the moment.

As we look internationally we see many examples of this. I have gone through the Euro area data today but if we switch to the US the numbers are even higher. The annual rate of M1 growth is 27.5% there so the pedal may even have been pushed through the metal. Care is needed as definitions vary but even using a more Euro area one it looks as though it would be over 20%.

As well as some hoped for economic growth there is a clear and present danger which is inflation. We seem likely to be singing along with BB King.

Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent

I got the blues
Got those inflation blues

Euro area money supply is booming again

In ordinary times the 25 members of the Governing Council of the European Central Bank would be getting ready to go to Frankfurt. This time though, they may well be making sure their version of Zoom works properly.I do hope they are not using Zoom itself as it is not secure meaning that the hedge funds will be listening in again. As to there being 25 members it has an Executive Board of 6 as well as a representative of each country. Rather confusingly not all vote as there are too many to sit around the ECB table and around 4 drop out with the most significant being the Netherlands this time around. But as the main decisions have already been made and only perhaps some fine tuning in the offing that is a moot point this week.

Money Supply

This morning has brought news on past decisions however. In the melee it is easy to forget that before the pandemic the ECB had restarted QE and then fired something of a peashooter on the 12th of March.

A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes

So strong in fact that only 6 days later they announced this.

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).

These will have fed into the March data because the PEPP began on the 26th and the original much more minor “strong contribution” will have been in play for around half of the month. So what impact did they have?

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 10.3% in March from 8.1% in February.

Putting it another way M1 increased by 273 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder. As an aside cash rose by 26 billion in March which backs up to some extent my argument of yesterday about it. A clear rise but of course only one month.

Broad Money

As you can see this soared as well.

Annual growth rate of broad monetary aggregate M3, increased to 7.5% in March 2020 from 5.5% in February.

If we take the advice of Kylie ( I’m breaking it down) we see this.

Looking at the components’ contributions to the annual growth rate of M3,, the narrower aggregate M1 contributed 7.0 percentage points (up from 5.5 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed 0.0 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.5 percentage point (up from 0.1 percentage point).

So we see that the QE push is such that this time around broad money is effectively narrow money. We can ignore M2 which is doing almost nothing but then we see marketable instruments are in the game as well albeit more minor at 34 billion Euros. Indeed this is almost entirely debt-securities with a maturity of up to two years. I am picking them out because their total is only 60 billion so they have seen more than a doubling in one month.

Counterparts

We can do this almost MMT style and do indeed learn a thing or two.

the annual growth rate of M3 in March 2020 can be broken down as follows: credit to the private sector contributed 4.5 percentage points (up from 3.7 percentage points in February), net external assets contributed 2.1 percentage points (down from 2.7 percentage points), credit to general government contributed 0.6 percentage point (up from -0.7 percentage point), longer-term financial liabilities contributed -0.2 percentage point (up from -0.5 percentage point), and the remaining counterparts of M3 contributed 0.4 percentage point (up from 0.3 percentage point).

Care is needed as this sort of application of mathematics to economics is invariably presented as a type of Holy Grail followed by the sound of silence when it then goes wrong. But we do see that the credit impulse is now much more domestic as the foreign flows decline in absolute percentage terms and then have a second effect of being compared to a larger number.

What about credit flows?

The initial impact is a swing towards the public sector as we see credit there taking quite a move.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 3.5% in March 2020 from 2.0% in the previous month. The annual growth rate of credit to general government increased to 1.6% in March from -2.0% in February, while the annual growth rate of credit to the private sector increased to 4.2% in March from 3.4% in February.

The growth rate had been negative since last June and I expect quite a surge now because it was 15.7% at its peak in the credit crunch and we see so much fiscal policy being enacted.

Switching to the private-sector we lack the detail to really take a look.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) increased to 5.0% in March from 3.7% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.4% in March from 3.7% in February, while the annual growth rate of adjusted loans to non-financial corporations increased to 5.4% in March from 3.0% in February.

We learn a couple of things. There will be a lag before we pick up the fall in mortgage lending and new business lending was a record.

New bank loans to euro area non-financial corporates in March: +€118bn. Previous record was €66bn in December 2007………French banks were the largest contributors (€38bn in new corporate loans out of €118bn total) but the rise was fairly broad-based: Germany €22bn; Italy €17bn; Spain €16bn. ( @fwred)

This goes as follows. Good as banks are lending to companies but then Bad as we think why they want it and can they pay it back?!

Comment

These numbers matter because they give us a good idea of what is coming around the economic corner. For example narrow money growth impacts the domestic economy in somewhere between a few months and six months ahead. We have not seen double-digit-growth for a while and when we last did we got the Euro boom of 2017/18. Except these are about as far from ordinary times as we have seen and we are seeing the carburetor being flooded with petrol and the economy stalling. Putting it back into monetary terms velocity seems set to collapse again.

Another perspective is provided by the “pure” broad money growth which is the monetary equivalent of incestuous. Why? Well those short-term securities look as if they might be designed to be bought by the PEPP programme.

To expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.

(3) To ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, we will expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector.

More recently there has been this.

ECB to grandfather until September 2021 eligibility of marketable assets used as collateral in Eurosystem credit operations falling below current minimum credit quality requirements

In case you are wondering why? I am thinking Italy and Renault but I am sure there are others.

Moving on let me highlight a catch in this Such programmes will help big business but what about the smaller ones? We are back to the zombie culture and perhaps zombie money supply growth.

 

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.

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