Negative interest-rates are on the march yet again

A feature of the modern era is that things which are permanent are described as “temporary”. This has been particularly true in the era of interest-rates as it is easy to forget now that the low interest-rates of 2009/10 were supposed to be so. The reality is that they went even lower and in more than a few places went negative which again was supposed to be temporary. But the list got longer along the lines of the famous Elvis Presley song.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

I have written before that I think that there are two factors in this being passed onto the ordinary depositor. Firstly how negative interest-rates become and secondly how long they are negative for. The reason why there is any delay in the pass on to depositors and savers is that the banks are afraid they will withdraw their cash and hence break their business model apart.

Germany

On the 19th of last month we noted that some German banks were looking to spread the negativity net wider and according to Bloomberg some smaller ones have broken ranks.

After five years of negative rates imposed by the European Central Bank, German lenders are breaking the last taboo: Charging retail clients for their savings starting with very first euro in the their accounts.

While many banks have been passing on negative rates to retail clients for some time, they have typically only done so for deposits of 100,000 euros ($111,000) or more. That is changing, with one small lender close to Munich planning to impose a rate of minus 0.5% to all savings in certain new accounts. Another bank in the east of the country has introduced a similar policy and a third is considering an even higher charge.

This is the system we have some to expect where a small bank or two is used as a pathfinder to test the water. I wonder if there is some sort of arrangement here although this from Bloomberg is also true.

 While there are some exemptions under the policy, years of sub-par profitability have left especially smaller lenders with few options to offset the cost of the ECB’s charges.

The irony is not lost on me that policies brought in to protect “The Precious” are now damaging it and may yet destroy it. I also find it fascinating to whom Bloomberg went for an opinion as it is straight out of the European equivalent of Yes Prime Minister.

“For now, negative rates are probably a signal to new clients that a bank doesn’t need any additional deposits,” said Isabel Schnabel, a professor at the University of Bonn who was nominated by Germany to join the ECB’s Executive Board. “I would assume that banks are a lot more cautious with existing customers.”

Kylie Minogues “Spinning Around” should be playing in the background to that. Still Isabel should fit in well with the ECB Executive Board as we get some strong hints as to why she was nominated.

Who is it?

The banks are shown below.

Now Volksbank Raiffeisenbank Fuerstenfeldbruck, a regional bank close to Munich, is among the first brushing off such concerns. The bank says it will impose a negative rate of 0.5% on new clients who open a popular form of saving account……….Kreissparkasse Stendal, in the east of the country, has a similar policy for clients who have no other relationship with the bank. Both lenders levy the charges on new customers who open a type of savings account that allows for daily, unlimited withdrawals, a popular instrument among German savers. Existing customers are mostly exempt for now.

The way that this has been such a slow process shows that the banks are afraid of deposit flight or a type of run on the bank. So far we do not know when that would occur although we do know now that some versions of negative interest-rates do not cause it. As the plan below is for an extra -0.05% it seems unlikely to be the trigger.

Frankfurter Volksbank, one of the country’s largest cooperative lenders, is considering going even further and charging some new customers 0.55% for all their deposits, Frankfurter Allgemeine Zeitung reported, without saying where it got the information. The lender said in a statement it has not made any decisions yet.

Denmark

The Straits Times has picked up on an interview by the Governor of the central bank Lars Rhode and it is rather revealing.

In Denmark, where banks have lived with negative rates since 2012, it’s now clear that life below zero isn’t about to end any time soon. People need to understand that it’s “lower for longer”, Rohde said. And that will “definitely” have negative consequences for lenders, he said.

He also gave a speech yesterday and in it there was this.

Digitalisation and new legislation give more players access to the market for bank products. From the payments market we know that digital solutions have a tendency to create natural monopolies because it costs less to perform one extra transaction once the digital infrastructure is in
place.

That was ominous as banks already have problems with their business model and it got worse as he told them who he had in mind.

In recent years, we have seen tech giants, such as Apple and Amazon, enter the financial market. Experience from both the USA and China shows that these firms are extending their original core business to include payments and subsequently also financial services such as
lending.

Is he telling them they are obsolete and dinosaurs. Still he did manage some humour.

Well-functioning IT systems and a tight rein on costs will be key competitive parameters for banks in the coming years.

As the Straits Times puts it.

But years of negative rates, tougher regulatory requirements and, in some cases, out of date technology, have put some banks on the back foot.

Indeed this may put a chill down bankers spines.

According to a report in Borsen on Tuesday, Apple Pay has now established itself as a considerably more popular app among Danish shop owners than a local mobile payment solution offered by Nets A/S, which has so far dominated digital payments within the Nordic region.

So far Danish banks are resisting the trend towards negative interest-rates for all.

For now, lenders have drawn the line at 750,000 kroner (S$152,000), which is the threshold below which deposits are covered by guarantees.

Comment

There is a steady drip drip here and there is some other news which suggests to me that the ECB may be genuinely afraid. In its latest round of monetary easing there was also tiering of deposits for banks at the ECB itself which may reduce the costs there by a third. But in the last week or two there are signs of something more subtle regarding bank capital.

Enter Mr Enria new head of the SSM… And Unicredit’ s new business plan presented this morning. In which they make clear that Pillar 2 would be CET1 AT1 and T2. This means in practice :

A) a big CET1 relief for banks (80bps for Unicredit)

B) a massive need of new AT1/T2

( @jeuasommenulle )

He thinks that today’s announcement from Unicredit of Italy hints that the capital requirements for risk-weighted assets are being trimmed. There has been a change in who is in charge and more flexibility seems to be in the offing. This adds to the hint provided last week in the proposed banking merger between Unicaja and Liberbank as in the past it might have been stymied by a demand for more capital. Oh and SSM is Single Supervisory Mechanism.

This echoes partly because of this if we return to the Governor of the Danish central bank.

This creates an underlying need for consolidation, also within the financial sector.

So it is a complex picture and remember some policymakers at the ECB wanted to turn the screw even harder with a Deposit Rate of -0.6%.

 

 

Australia gets ready for QE but claims to reject negative interest-rates

So far the credit crunch era has been relatively kind to Australia. A major factor in this has simply been one of location as its huge natural resources have been a boon and that has been added to by its proximity to a large source of demand. Or putting it another way that is why we have at times given it the label of the South China Territories. However times are now rather different with the headlines being occupied by the subject of the various trade wars and as we have noted along the way this is particularly impacting on the Pacific region. Thus we find that the Governor of the Reserve Bank of Australia has given a speech this morning on unconventional monetary policy as they too fear that the super massive black hole that was the impact of the credit crunch may be pulling them towards an event horizon.

Why?

If we look at the state of play as claimed by Philip Lowe you may be wondering why this speech is necessary at all?

The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 per cent in 2021. This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually.

This is straight out of the central banking playbook where you discuss such moves and then imply they will not be necessary. They think it is a way of deflecting blame and speaking of deflecting blame interest-rate cuts are nothing to do with them either.

low interest rates are not a temporary phenomenon. Rather, they are likely to be with us for some time and are the result of some powerful global factors that are affecting interest rates everywhere

If interest-rates are indeed set by “powerful global factors” then we could trim central banks down to a small staff surely?

Banks

As ever it turns out to be all about “The Precious! The Precious!” for any central banker.

At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms. In any given currency, the Australian banks can raise funds at the same price as other similarly rated financial institutions around the world, and markets are not stressed.

You might think that plunging into unconventional economic policy might be driven by the real economy but oh no as you can see there is a different driver. In spite of the effort below to say Australia is different this means that it has learnt nothing and will make the same mistakes.

We are not in the same situation that has been faced in Europe and Japan. Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation. So we are in a much stronger position.

Again this is a central banking standard as they claim “this time is different” and then apply exactly the same policies!

QE it is then

We get various denials which I will come to in a bit but the crux of the matter is below.

My fourth point is that if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.

The explanation of why he would choose this option will certainly be popular with Australia’s politician’s.

The first is the direct price impact of buying government bonds, which lowers their yields. And the second is through market expectations or a signalling effect, with the bond purchases reinforcing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.

You may note that he has contradicted himself with the second point as he has already told us that low interest-rates are “are likely to be with us for some time”.  He then points out again that he has already acted this year.

It is important to remember that the economy is benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector.

That also gets awkward because having cut interest-rates by 0.75% already this calendar year Governor Lowe is implying we could get to his QE threshold quite quickly.

Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that. At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.

Why QE?

Well he is clearly no fan of negative interest-rates.

More broadly, though, having examined the international evidence, it is not clear that the experience with negative interest rates has been a success.

Indeed he may even have read yesterday’s post on here.

Negative interest rates also create problems for pension funds that need to fund long-term liabilities.

Or perhaps he has been a longer-term follower.

In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement. A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious.

Although this bit is quite a hostage to fortune and may come back to haunt Governor Lowe.

The second observation is that negative interest rates in Australia are extraordinarily unlikely.

Comment

It is hard not to have a wry smile as central bankers catch up with a point I was making about a decade ago.

Given these considerations, it is not surprising that some analysts now talk about the ‘reversal interest rate’ – that is, the interest rate at which lower rates become contractionary, rather than expansionary

I argued it was in the region of 1.5% and Australia is now well below it so it is I think singing along with 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

As to why the RBA is preparing the ground for even more monetary action then let me switch to Deputy Governor Debelle who also spoke today. This starts well.

Over much of the past three years, employment has grown at a healthy annual pace of 2½ per cent. This has been faster than we had expected, particularly so, given economic growth was slower than we had expected.

But in a reversal of the Meatloaf dictum that “two out of three aint bad” we get this.

But the unemployment rate has turned out to be very close to what we had expected and has moved sideways around 5¼ per cent for some time now………Then I will look at wages growth and show that the lower average wage outcomes of the past few years have reflected the increased prevalence of wages growth in the 2s across the economy.

The next issue is that does the mere mention of QE operate in the same manner as The Candyman in the film? If so that is at least 2 mentions in Australia so at the most we have 3 to go before it appears.

Finally with a ten-year bond yield already at 1.06% or about 1.5% lower than a year ago, what extra is there to be gained?

 

 

 

 

Christine Lagarde trolls Germany and asks for more fiscal stimulus

This morning has seen the first set piece speech of the new ECB President Christine Lagarde and it would not be her without some empty rhetoric.

The idea of European renewal may, for some, elicit feelings of cynicism. We have heard it many times before: “Europe is at a crossroads”; “now is Europe’s moment”. Often that has not proven to be the case. But this time does in fact seem different.

To her perhaps, just like the Greek bailout was “shock and awe” which I suppose in the end it was just as a doppelganger of what she meant.

We also got some trolling of Germany.

Ongoing trade tensions and geopolitical uncertainties are contributing to a slowdown in world trade growth, which has more than halved since last year. This has in turn depressed global growth to its lowest level since the great financial crisis.

These uncertainties have proven to be more persistent than expected, and this is clearly impacting on the euro area. Growth is expected to be 1.1% this year, i.e. 0.7 percentage points lower than we projected a year ago

A lot of the reduction and impact has been on Germany but what Christine does not say is that this has become a regular Euro area issue where economic growth has been downgraded or poor or both. Briefly around 2017 we had the Euro boom but that required the monetary taps to be wide open. Missing here in the analysis is the fact that the stimulus was withdrawn into a growth slowdown.

Did I say there was some trolling of Germany?

At the same time, there are also changes of a more structural nature. We are starting to see a global shift – driven mainly by emerging markets – from external demand to domestic demand, from investment to consumption and from manufacturing to services.

Then we move onto rhetoric that is simply misleading.

The answer lies in converting the world’s second largest economy into one that is open to the world but confident in itself – an economy that makes full use of Europe’s potential to unleash higher rates of domestic demand and long-term growth.

She is setting policy for the Euro area and not Europe and the ECB itself tells us this about the Euro area.

Compared with its individual member countries, the euro area is a large and much more closed economy. In terms of its share of global GDP, it is the world’s third-largest economy, after the United States and China.

Economics

It is revealing that the next section was titled “resilience and rebalancing” words which these days send a bit of a chill down the spine. This chill continues as we see a call for this.

And when global growth falls, stronger internal demand can help protect jobs, too. This is because domestic demand is linked more to services – which are more labour-intensive – while external demand is linked more to manufacturing, which is less labour-intensive.

We are seeing that shield in action in the euro area today: the resilience of services is the key reason why employment has not yet been affected by the global manufacturing slowdown.

The word “yet” may turn out to be rather important. Also there is a catch which is sugar coated..

In the euro area, domestic demand has contributed to the recovery, helping to create 11.4 million new jobs since mid-2013.

But then reality intervenes.

But over the past ten years, domestic demand growth has been almost 2 percentage points lower on average than it was in the decade before the crisis, and it has been slower than that of our main trading partners.

In addition there is a problem.

The ECB’s accommodative policy stance has been a key driver of domestic demand during the recovery, and that stance remains in place.

This is highlighted if we think what Euro area domestic demand would have been without all the ECB stimulus. Her predecessor Mario Draghi suggested that this was in the area of a 2% boost to both GDP and inflation. I guess Christine left that out as it would be too revealing, or it could be that she is simply unaware of it.

A Double Play

The space for monetary policy is limited as Mario Draghi in what I think was a revealing move tied the new ECB President’s hands for a bit by resuming QE ( 20 billion Euros a month) and cutting the deposit rate to -0.5%. So we are left with what some might call interference in politics.

One key element here is euro area fiscal policy, which is not just about the aggregate stance of public spending, but also its composition. Investment is a particularly important part of the response to today’s challenges, because it is both today’s demand and tomorrow’s supply.

The problem is defining what investment is and which bits are  genuinely useful. For example I recall in the Euro area crisis the example of new toll roads in Portugal which were empty because people could not afford them.

However as with some many central bankers these days Christine firmly presses the climate change klaxon.

While investment needs are of course country-specific, there is today a cross-cutting case for investment in a common future that is more productive, more digital and greener.

There is a clear problem below if we look at growth prospects in the light of this speech alone.

But a stronger domestic economy also rests on higher business investment, and for that raising productivity is equally important. Firms need to be confident in future growth if they are to commit long-range capital.

Because as even Christine is forced to admit the US has done better in this area.

Though all advanced economies are facing a growth challenge, the euro area has been slower to embrace innovation and capitalise on the digital age than others such as the United States. This is also reflected in differences in total factor productivity growth, which has risen by only half as much in the euro area as it has in the United States since 2000.

How do we deal with this? Well she is a politician so bring out some large numbers that most will immediately forget.

And the projected gains are significant: new studies find that the full implementation of the Services Directive would lead to gains in the order of €380 billion], while completing the digital single market would yield annual benefits of more than €170 billion.

Comment

The most revealing part of all this is below as you know you are in trouble when politicians start talking about opportunities.

We have a unique possibility to respond to a changing and challenging world by investing in our future, strengthening our common institutions and empowering the world’s second largest economy.

Maybe by the next speech someone will have told her it is the third largest. Also what growth and why has it not be tried over the past 20 years?

In this way, we could tap into new sources of growth that would otherwise be suppressed.

Let me switch tack and welcome a new female head of a central bank but if we look at the other main example we see yet another problem. Here is Janet Yellen on CNBC.

“Some of the most disturbing notes came from people who said, ’I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing,” Yellen recalled. “Savers are getting penalized. It’s true.”

This is even more true in the Euro area as we looked at on Tuesday but Lagarde  just skates by.

fewer side effects

The problem has been highlighted this morning by the Markit PMI business surveys.

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.

Another nuance is that you can read the speech as in essence the French trolling Germany which seems to be a theme these days and a source of Euro area friction.

Also if we look at money markets there may be trouble ahead.

SPIKE IN ECB’S NEW OVERNIGHT RATE ESTR THIS WEEK SPARKED BY REGULAR CONTINGENCY PLANNING BY FRENCH BANKS – TRADERS  ( @PriapusIQ )

Why the 20th of the month?

We end by returning to an all too familiar theme, why do we always need stimulus?

 

 

 

The ECB starts to face up to some of the problems of the Euro area banks

Today has brought the Euro area financial sector and banks in particular into focus as the ECB ( European Central Bank ) issues its latest financial stability report. More than a decade after the credit crunch hit one might reasonably think that this should be a story of success but it is not like that. Because the ECB is rather unlikely to put it like this a major problem is that the medicine to fix the banks ( lower interest-rates) turned out to be harmful to them if you not only continued but increased the dose. Or as Britney Spears would put it, the impact of negative interest-rates on banks is.

I’m addicted to you
Don’t you know that you’re toxic?
And I love what you do
Don’t you know that you’re toxic?

Actually the FSR starts with another confession of trouble as it reviews the Euro area economy.

The euro area economic outlook has deteriorated, with growth expected to remain subdued for longer. Mirroring global growth patterns, information since the previous FSR indicates a more protracted weakness of the euro area economy, leading to a downward revision of real GDP growth forecasts for 2020-21.

There is the by traditional element of blaming Johnny Foreigner which has some credibility with the trade war issue. However if we look deeper we were reminded only yesterday about the told of the Euro area in its genesis.

In September 2019 the current account of the euro area recorded a surplus of €28 billion, compared with a surplus of €29 billion in August 2019. In the 12-month period to September 2019, the current account recorded a surplus of €321 billion (2.7% of euro area GDP), compared with a surplus of €378 billion (3.3% of euro area GDP) in the 12 months to September 2018.

It sometimes gets forgotten now that one of the factors in the build-up to the credit crunch was the Euro area ( essentially German ) trade surplus.

However the essential message here is that lower economic growth is providing a challenge to the Euro area financial sector and banks and tucked away at the bottom of this section is one of the reasons why.

At the same time, inflationary pressures in the euro area are forecast to remain muted over the next two years, translating into overall weaker nominal growth prospects.

Paying down debt can be achieved via inflation as well as real economic growth and is one of the reasons why the ECB keeps implementing policies to get inflation up towards its 2% per annum target. A sort of stealth tax.

Bond Markets

There is a warning here.

Asset valuations, reliant on low interest rates, could face future corrections.

If we start with sovereign bonds then there is am implied danger for Germany as it has the largest sector with negative yields. But if we switch to banking exposure then eyes turn to Italy because not only does it have a large relative national debt but its banks hold a relatively large proportion of it at 20%. They will have done rather well out of the ten-year yield falling by over 2% to 1.3% over the past year but is that the only way Italian banks make money these days? There is a reflection of this sort of thing below.

Very low interest rates, coupled with the large number of investors which have gradually increased the duration of their fixed income portfolios, could exacerbate potential losses if an abrupt repricing were to materialise in the medium-to-long run.

Tucked away is an arrow fired at Germany.

there is a strong case for governments with fiscal space to act in an effective and timely manner.

What about the banks?

Here we go.

Bank profitability concerns remain prominent. Bank profitability prospects have weakened against the backdrop of the deteriorating growth outlook  and the low interest rate environment, especially for banks also facing structural cost and income challenges (see Special Feature A).

Nobody seems to want to back them with their money.

Reflecting these concerns, euro area banks’ market valuations remain depressed with an average price-to-book ratio of around 0.6.

Although the ECB would not put it like this if this was a rock concert the headliner would be my old employer Deutsche Bank. It has a share price of 6.5 Euros which certainly must depress long-term shareholders who have consistently lost money. There have been rallies in this example of a bear market and well played if you have taken advantage but each time they have been followed by Alicia Keys on the stereo.

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

This bit is both true and simply breathtaking!

Banks have made slow progress in addressing structural challenges to profitability.

If you have policies which are fertiliser for zombie banks then complaining about a march of the zombies is a bit much. In this area it is Halloween every day.

If you are wondering about Special Feature A so was I.

These banks all stand out in terms of elevated cost-to-income ratios. But there also appear to be three distinct groups: (i) banks struggling with legacy asset problems; (ii) banks with weak income-generation capacity; and (iii) banks suffering from a combination of cost and revenue-side problems.

We are told this is only for a “sub set” but point (iii) is plainly a generic issue in the Euro area banking sector. The proposed solution looks not a little desperate.

But in systems with many weak-performing small banks, consolidation within their domestic system could improve performance. Finally, a combination of bank-level restructuring and cross-border M&A activity could help reduce the costs and diversify the revenues of large banks that are performing poorly.

Consolidating the cajas in Spain and some of the smaller banks in Italy did reduce the number of banks in trouble but did not change the problem.There is a bit of shuffling deckchairs on the Titanic about this which turns to laughter as I consider “cross-border M&A activity”. Like RBS in the UK? That was one of the ways we got into this mess. One of the problems with banking right now is what do they diversify into?

On aggregate, euro area banks’ return on equity is expected to remain low, limiting the sector’s ability to increase resilience through retained earnings

Er well yes.

Should this all go wrong we will be told we were warned.

A banking system operating with significant overcapacity is also vulnerable to weak competitors driving down lending standards and an underpricing of risk.

Shadow Banking?

Some of the role of banks has moved elsewhere and of course there are plenty of issues for long-term savings in a negative interest-rate world.

After a slight decline in the last quarter of 2018, the total assets of investment funds (IFs), money market funds (MMFs), financial vehicle corporations, insurance corporations (ICs), pension funds (PFs) and other financial institutions gradually increased to almost €46 trillion in June 2019, and represented 56% of total financial sector assets.

Also what do you expect if you drive some corporate bond yields negative by buying so many of them?

But more recently, the low cost of market-based debt has supported a further increase in NFCs’ debt issuance – particularly of investment-grade bonds.

Can anybody remember a time when relying on bond ratings went wrong?

Negative interest-rates again.

As yields have fallen, non-bank financial intermediaries hold a growing share of low-yielding bonds, which decreases their investment income in the medium term and encourages risk-taking.

Comment

The press release is if we read between the lines quite damning.

Low interest rates support economic activity, but there can be side effects

Signs of excessive risk-taking in some sectors require monitoring and targeted macroprudential action in some countries

Banks have further increased resilience, but have made limited progress in improving profitability.

It is welcome that we are seeing some confession of central banking sins but it comes with something else I have noticed recently which is that ECB related accounts are taking the battle to social media.

Dear fellow German economists, if you are wondering what you can do for Europe: Please help to dispel the harmful & wrong narratives about the @ecb  ‘s monetary policy, floating around in political and media circles. These threaten the euro more than many other things.

That is from Isabel Schnabel who is the German government and Eurogroup approved candidate to be a new member on the ECB board. From the replies it is not going down too well but we can see clearly why she was appointed at least.

Me on The Investing Channel

The mad world of negative interest-rates is on the march

Yesterday as is his want the President of the United States Donald Trump focused attention on one of our credit crunch themes.

Just finished a very good & cordial meeting at the White House with Jay Powell of the Federal Reserve. Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc.

I guess he was at the 280 character limit so replaced negative interest-rates with just negative interest. In a way this is quite extraordinary as I recall debates in the earlier part of the credit crunch where people argued that it would be illegal for the US Federal Reserve to impose negative interest-rates. But the Donald does not seem bothered as we see him increasingly warm to a theme he established at the Economic Club of New York late last week.

“Remember we are actively competing with nations that openly cut interest rates so that many are now actually getting paid when they pay off their loan, known as negative interest. Who ever heard of such a thing?” He said. “Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it.” ( Reuters )

That day the Chair of the US Federal Reserve Jerome Powell rejected the concept according to CNBC.

He also rejected the idea that the Fed might one day consider negative interest rates like those in place across Europe.

The problem is that over the past year the 3 interest-rate cuts look much more driven by Trump than Powell.

Of course, there are contradictions.Why does the “best economy ever” need negative interest-rates for example? Or why a stock market which keeps hitting all-time highs needs them? But the subject keeps returning as we note yesterday’s words from the President of the Cleveland Fed.

Asked her view on negative interest rates, Mester told the audience that Europe’s use of them “is perhaps working better than I might have anticipated” but added she is not supportive of such an approach in the United States should there be a downturn.

Why say “working better” then reject the idea?  We have seen that path before.

The Euro area

As to working better then a deposit-rate of -0.5% and of course many bond yields in negative territory has seen the annual rate of economic growth fall to 1.1%. Also with the last two quarterly growth readings being only 0.2% it looks set to fall further.

So the idea of an economic boost being provided by them is struggling and relying on the counterfactual. But the catch is that such arguments are mostly made by those who think that the last interest-rate cut of 0.1% made any material difference. After all the previous interest-rate cuts that is simply amazing. Actually the moves will have different impacts across the Euro area as this from an ECB working paper points out.

A striking feature of the credit market in the euro area is the very large heterogeneity across countries in the granting of fixed versus adjustable rate mortgages.
FRMs are dominant in Belgium, France, Germany and the Netherlands, while ARMs are prevailing in Austria, Greece, Italy, Portugal and Spain (ECB, 2009; Campbell,
2012)

Actually I would be looking for data from 2019 rather than 2009 but we do get some sort of idea.

Businesses and Savers in Germany are being affected

We have got another signal of the spread of the impact of negative interest-rates .From the Irish Times.

The Bundesbank surveyed 220 lenders at the end of September – two weeks after the ECB’s cut its deposit rate from minus 0.4 to a record low of minus 0.5 per cent. In response 58 per cent of the banks said they were levying negative rates on some corporate deposits, and 23 per cent said they were doing the same for retail depositors.

There was also a strong hint that legality is an issue in this area.

“This is more difficult in the private bank business than in corporate or institutional deposits, and we don’t see an ability to adjust legal terms and conditions of our accounts on a broad-based basis,” said Mr von Moltke, adding that Deutsche was instead approaching retail clients with large deposits on an individual basis.

So perhaps more than a few accounts have legal barriers to the imposition of negative interest-rates. That idea gets some more support here.

Stephan Engels, Commerzbank’s chief financial officer, said this month that Germany’s second largest listed lender had started to approach wealthy retail customers holding deposits of more than €1 million.

Japan

The Bank of Japan has dipped its toe in the water but has always seemed nervous about doing anymore. This has been illustrated overnight.

“There is plenty of scope to deepen negative rates from the current -0.1%,” Kuroda told a semi-annual parliament testimony on monetary policy. “But I’ve never said there are no limits to how much we can deepen negative rates, or that we have unlimited means to ease policy,” he said. ( Reuters )

This is really odd because Japan took its time imposing negative interest-rates as we had seen 2 lost decades by January 2016 but it has then remained at -0.1% or the minimum amount. Mind you there is much that is crazy about Bank of Japan policy as this next bit highlights.

Kuroda also said there was still enough Japanese government bonds (JGB) left in the market for the BOJ to buy, playing down concerns its huge purchases have drained market liquidity.

After years of heavy purchases to flood markets with cash, the BOJ now owns nearly half of the JGB market.

In some ways that fact that a monetary policy activist like Governor Kuroda has not cut below -0.1% is the most revealing thing of all about negative interest-rates.

Switzerland

The Swiss found themselves players in this game when the Swiss Franc soared and they tried to control it. Now they find themselves with a central bank that combines the role of being a hedge fund due to its large overseas equity investments and has a negative interest-rate of -0.75%.

Nearly five years after the fateful day when the SNB stopped capping the Swiss Franc we get ever more deja vu from its assessments.

The situation on the foreign exchange market is still fragile, and the Swiss franc has appreciated in trade-weighted terms. It remains highly valued.

Comment

I have consistently argued that the situation regarding negative interest-rates has two factors. The first is how deep they go? The second is how long they last? I have pointed out that the latter seems to be getting ever longer and may be heading along the lines of “Too Infinity! And Beyond!”. It seems that the Swiss National Bank now agrees with me. The emphasis is mine.

This adjustment to the calculation basis takes account of the fact that the low interest rate environment around the world has recently become more entrenched and could persist for some time yet.

We have seen another signal of that recently because the main priority of the central banks is of course the precious and we see move after move to exempt the banks as far as possible from negative interest-rates. The ECB for example has introduced tiering to bring it into line with the Swiss and the Japanese although the Swiss moved again in September.

The SNB is adjusting the basis for calculating negative interest as follows. Negative interest will continue to be charged on the portion of banks’ sight deposits which exceeds a certain exemption threshold. However, this exemption threshold will now be updated monthly and
thereby reflect developments in banks’ balance sheets over time.

If only the real economy got the same consideration and courtesy. That is the crux of the matter here because so far no-one has actually exited the black hole which is negative interest-rates. The Riksbank of Sweden says that it will next month but this would be a really odd time to raise interest-rates. Also I note that the Danish central bank has its worries about pension funds if interest-rates rise.

A scenario in which interest rates go up
by 1 percentage point over a couple of days is not
implausible. Therefore, pension companies should
be prepared to manage margin requirements at
all times. If the sector is unable to obtain adequate
access to liquidity, it may be necessary to reduce the
use of derivatives.

Personally I am more bothered about the pension funds which have invested in bonds with negative yields.After all, what could go wrong?

 

 

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.

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How has the Riksbank misjudged the economy of Sweden so badly?

Today is the day that central bankers gather for the annual symposium at Jackson Hole in Wyoming. This has produced quite a few changes in central banking policy in recent times such as the introduction of Forward Guidance for interest-rates. Of course that has been a complete failure as the hosting US Federal Reserve is now cutting interest-rates after “guiding” people towards rises.But the title of this year’s symposium does lead into my subject to today. So here is the Kansas City Fed.

Challenges for Monetary Policy

Actually somewhat typically they then lose the plot.

Different rates of recovery have led central banks to chart different courses for the normalization of monetary policy following a period in which most central banks used both conventional and unconventional monetary policy tools in response to the Great Recession. Whereas some central banks are approaching a neutral policy setting, others have yet to begin the process of removing policy accommodation.

Meanwhile back in the real world the one central bank (itself) which had tried to engage neutral has in fact engaged reverse. I suppose they get to some by the central banks which follow the Fed. But rather than thinking about “removing policy accommodation” other central banks such as the ECB are now looking for a gear box with more reverse gears.

Let me now move to a specific example which in a way is symbolised by a symposium starting later for which we do not have a schedule yet! The only thing we do know is that Fed Chair Jerome Powell speaks tomorrow afternoon.

Riksbank

This whole procedure reminds me of the Riksbank which decided it would be amongst the shock troops of the monetary accommodation era. It cut interest-rates into negative territory ( -0.5%) and engaged in some QE bond buying. Then after years of promising a change it did this last December.

The Executive Board has therefore decided to raise the repo rate from −0.50 per cent to −0.25 per cent. The forecast for the repo rate indicates that the next rate rise will probably occur during the second half of 2019. With a repo rate of −0.25 per cent, monetary policy is still expansionary and will thereby continue to support economic activity.

This was one of the challenges for monetary policy or today;s theme as I pointed out at the time. From the 20th of December.

Actually there is quite a bit that is odd about this as indeed there has been, in my opinion, about the monetary policy of the world’s oldest central bank for some time. Let me give you two clear reasons to be doubtful. Firstly GDP growth plummeted from the 1% of the second quarter of this year to -0.2% in the third…….Moving onto inflation the outlook has also changed as we have moved towards the end of 2018.

Actually there was another problem as how did this work out for the Riksbank?

this can partly be explained by temporarily weak car sales.

So as you can see I was pointing out at the time that this was odd as the Riksbank had ignored the good times for the Swedish economy and then as I put it panicked fearing it would approach the next slow down with interest-rates already negative.

Ch-ch-changes

If we move forwards to the July policy meeting the minutes tell us this.

Similarly for Sweden, expectations of further monetary policy stimulation have increased. Pricing on the
financial markets now indicates a higher probability of a rate cut than of a rate rise while bank economists in general expect a postponement of the repo rate increases.

As you can see they were facing up to a situation where even they must have realised they had lost credibility on the subject of interest-rate rises. If we now move forwards to the end of July Sweden Statistics produced more bad news.

Sweden’s GDP decreased 0,1 percent in the second quarter of 2019, seasonally adjusted and compared to the first quarter of 2019. GDP increased by 1,4 percent, working-day adjusted and compared to the second quarter of 2018.

I am less concerned by the contraction than the annual rate. There had been a good first quarter so the best perspective was shown by an annual rate of 1.4%. You see in recent years Sweden has seen annual economic growth peak at 4.5% and at the opening of 2018 it was 3.6%. So it is quite clear that the timing of the interest-rate rise was something of a shocker or in football parlance an own goal.

Today

Sweden Statistics has produced some concerning news.

In July 2019 there were 5 239 000 employed persons. The unemployment rate was 6.9 percent, a decrease of 0.9 percentage points compared with July 2018.

What’s concerning about that? Well they have confused the concepts of up and down as the rate increased rather than decreased.

In July 2019, there were 390 000 unemployed persons aged 15─74, not seasonally adjusted, an increase of 50 000 compared with July 2018. The number of unemployed men increased by 29 000 to 202 000. There were 188 000 unemployed women. The unemployment rate was 6.9 percent, an increase of 0.9 percentage points compared with July 2018.

This poses a real problem for the Riksbank because if we look at the accompanying chart they have raised interest-rates into a downwards turn in the unemployment situation. We know that employment can be a leading indicator so let us look at that.

In July 2019, there were 5 239 000 employed persons aged 15─74, not seasonally adjusted. The number of employed men was 2 739 000, a decrease of 39 000 compared with July 2018. The number of employed women was 2 500 000. This was the third consecutive month in which the employment rate did not increase compared with the same month a year earlier. Prior to that, the number of employed persons had increased every month since September 2016. The employment rate was 69.8 percent, a decrease of 1.0 percentage point compared with the same month a year earlier.

As you can see the picture is not pretty there either. As an aside the labour market switch is sexist as it is mostly men, I guess it must be traditional male jobs being affected.

But the picture here is not only troubling for the Riksbank as we see another statistics agency with troubles.

Last time my model said recession, as it also does now, was ahead of 2012. But the statistics agency all through 2012 posted GDP at +1.5-2% y/y – happy times! Now when all revisions are done GDP was actually below 0% y/y most of 2012. ( Mikael Sarwe of Nordea )

There is more here from Michael Grahn of Danske Bank

Adding July LFS data to our GDP tracker model a very preliminary take on Q3 GDP say growth slowed to 0.9 % yoy.

Comment

The Governor of the Riksbank will have been a relieved man as he boarded his flight from Sweden to the Mid-West. He will escape the economic bad news by being elsewhere and may even find some suggestions from his central banking colleagues about what to do. But the reality is a cruel one in that he and his colleagues are in a pickle of their own making as their timing was so bad they have endulged in some pro-cyclical monetary policy in a downturn. Even worse their previous dithering means they start it with negative interest-rates (-0.25%).

Perhaps that is something they could discuss at Jackson Hole. How the Riksbank got things so wrong?

Let me open the discussion with a talking point.

The annual growth rate of the narrow monetary aggregate, M1, amounted to 6.8 percent in June, a decrease of 0.5 percentage point compared with May. M1 amounted to SEK 3 053 billion in June.

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