Japan finally sees some of the arrows of Abenomics hit the target but at what cost

A feature of 2022 has been the interest-rate increases by many central banks and the consequent rises in bond yields. But one namely the Bank of Japan has taken a different road as whilst the originator of Abenomics Shinzo Abe is sadly no longer with us the man he appointed as Governor of the Bank of Japan has continued with the same policies. So whilst the US has raised its official interest-rate to 3 3/4% to 4% Governor Kuroda has stuck to -0.1% leaving Japan as the only country with a negative interest-rate.

The Yen

One Abenomics arrow was a lower value of the Yen to boost economic competitiveness for Japan’s exporters and to get inflation higher towards the target of 2% annually. As The Japan Times reports this has been achieved this year.

From a starting point of ¥115 to the dollar at the beginning of the year, the yen reached a three-decade low of almost ¥152 to the dollar at the end of last month. And despite the Bank of Japan’s reported purchase of ¥6.35 trillion ($42.3 billion) in stealth currency intervention measures throughout October, the yen is still hovering at around ¥147 to the dollar.

I am not so sure about the “stealth currency intervention” description as it was pretty clear at the time. But finally the plans for Yen devaluation have come to fruition and in fact is anything suceeded too well as we have seen the Bank of Japan intervene to slow the fall.


Another objective of Abenomics was to end deflation and hence the lost decade by getting inflation to run at 2% per annum. Well according to NHK News we are there.

Japanese consumers are feeling the pinch as prices continue to rise. The internal affairs ministry said on Friday that the consumer price index, excluding fresh food, climbed 3 percent in September from a year earlier.

Japan has not seen that level of increase since August 1991, except for when the consumption tax was increased.

The government and the Bank of Japan have set an inflation target of 2 percent to pull the country out of deflation. September was the sixth straight month that the figure exceeded that mark.

Actually the advance numbers for Tokyo were at 3.5% for the headline. So according to both Abenomics and the Bank of Japan this should be some sort of nirvana but as you can see Japanese consumers are not so keen presumably related to the fact that food prices are up by 6.1% on a year ago.

Where is the economic boom?

The Bank of Japan summary of opinions look positive until you realise that there estimate of potential growth is basically 0% and maybe 0,5% if you are feeling generous.

Thereafter, as a virtuous cycle from income to spending intensifies gradually, Japan’s economy is projected to continue growing at a pace above its potential growth rate.

Also they seem to immediately lose confidence in that thought.

The pace of economic recovery in Japan is likely to decelerate in fiscal 2023, mainly because
overseas economies are expected to slow.

That is a bit awkward because Japan has seen some economic growth this year with the second quarter revised up to 0.9% it has yet to reach the previous peak. Plus the timescale below shows how long Japan has been in something of a malaise.

It is important to encourage households’ long-term and stable asset formation that takes into account expenditure over their lifetime, so that economic growth will lead to an increase in their disposable income.

What about wages?

This was supposed to be the next step where wages growth picked up and drove domestic consumption. How is that going?

The labor ministry’s preliminary figures show that the average wage for the month, including base and overtime pay, was 275,787 yen… or nearly 1,900 dollars.
That’s up 2.1 percent in yen terms from a year earlier, and is the ninth consecutive month of increase. ( NHK News)

As you can see it starts well although we already note that they see fit to mention 9 months of increases meaning nominal wages have previously fallen. But then we see something very familiar.

But workers may not be feeling the benefit. The average real wage, taking inflation into consideration, dropped in September by 1.3 percent from a year earlier. That was the sixth straight month of decrease. ( NHK News)

Even the government effort to spin matters ends up admitting we remain at square one.

Ministry officials say it has been rare in recent years to see a 2 percent rise in wages in September, when companies do not usually give out bonuses.
But they say real wages remain on the decline, as prices keep rising.

If we switch back to the Bank of Japan summary of opinions I have a real problem with this bit.

In achieving the price stability target of 2 percent in a stable manner, nominal wage increases are essential. Monetary easing contributes to a rise in such wages through channels of tightening labor market conditions and of higher inflation expectations due to price rises.

As this has been going since 2013 where have the nominal wages increases been hiding. We have some now but they are below inflation.

Fiscal Policy

This provides an enormous problem. Because Abenomics which as we have noted above is succeeding ( if we assume for a moment that wages are about to finally turn a corner). But the economic growth was supposed to end this sort of thing.

TOKYO, Oct 27 (Reuters) – Japan will unveil on Friday a fresh spending package of more than $200 billion that includes steps to curb electricity bills, sources told Reuters, which could tame inflation next year and help the central bank justify keeping ultra-low interest rates.

To be specific the economic growth partly helped by a fiscal boost that was temporary would lead to economic growth which would improve the fiscal position. Whereas not only have we seen stimulus packages become like a carousel I note that this one is set to reduce the inflation that has been the policy objective!

“Of components that make up the consumer price index, the subsidies would affect electricity and gas bills. Technically, they will push down Japan’s inflation rate in January-March,” analysts at Daiwa Securities said in a research note.

Implied in the stimulus package is the view that wages will not cover inflation. Thus we see that Jaki Graham was right.

Round and around and around round
Round and around and around round -That’s what you do
Round and around and around round.

So we end up with government debt levels like the one below.

TOKYO — Japan’s government debt per capita surpassed 10 million yen, or roughly $75,000, for the first time at the end of June, data released Wednesday shows, as Tokyo poured money into tackling both the coronavirus pandemic and inflation. ( Nikkei Asia)


On a superficial level policy in Japan is working as they now have inflation and a lower Yen. But with it comes costs and let me now bring in the demographics issue of an ageing and shrinking population.

The resultant narrower pay gap with emerging Asian nations has made it particularly difficult for Japan’s construction and nursing-care industries to hire the workers they need. ( Nikkei Asia)

Japanese wages have struggled plus the Yen has fallen. So there is an issue here. On addition a lower Yen is raising energy costs at a time they have risen anyway. Japan negotiated long-term deals which was wise but new deals will be expensive and an issue for the future.

Whilst Japanese industry has done pretty well this has not filtered through to its workers.

Considering that corporate profits have been at high levels on the whole ( Bank of Japan)

Also looking ahead things are deteriorating.

Japan Leading Economic Index below expectations (101.6) in September: Actual (97.4)……..Japan Consumer Confidence Index came in at 29.9, below expectations (31.5) in October. ( FX Street )

That is a little awkward when you already have your foot to the monetary floor.



Why are banks in trouble again?

The weekend just gone was rife with rumours of banks being in trouble. Rumours are of course the staple of financial markets especially on Friday afternoons. But then we got this.

ZURICH, Sept 30 (Reuters) – Credit Suisse (CSGN.S) has solid capital and liquidity, Chief Executive Ulrich Koerner told staff in a memo seen by Reuters on Friday and confirmed by a spokesperson for the Swiss bank that is due to announce the outcome of a strategic review next month.

“I know it’s not easy to remain focused amid the many stories you read in the media – in particular, given the many factually inaccurate statements being made. That said, I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,” he wrote, adding that he was unable to share details of transformation plans before Oct. 27.

Regular readers will be aware that I find the phrase “Never believe anything until it is officially denied” to be extremely useful. It came from variously Otto von Bismarck and Jim Hacker. But the point is that looks awfully like an official denial that Credit Suisse is in trouble. Also there was an unfortunate echo of the past here.

“Our capital position at the moment is strong.” Lehman Brothers CFO Sept 8, 2008.

As Lehman Brothers collapsed a week later this is not entirely reassuring.


There is some interesting timing here as the Swiss National Bank has done this in 2022.

I will begin with our monetary policy decision. We have decided to tighten our monetary
policy further and to raise the SNB policy rate by 0.75 percentage points to 0.5%.

That was from the 22nd of September and followed on from their previous decision to reduce their attempt to weaken the Swiss Franc when they raised from -0.75% to -0.25%.

There are two issues here of which the first is did that long period of negative interest-rates damage the banks?

Negative interest poses a challenge for banks, pension funds, insurance companies and savers. It may also have negative consequences for financial stability if the
search for yield leads to excessive risk taking.

If we keep the issue of excessive risk-taking in our minds we might like to recall this.

In March 2021, Archegos Capital Management, a family office founded by Bill Hwang, defaulted on its loan relationships with Credit Suisse (the Firm) after significant falls in the value of its positions. The default resulted in losses of around $5.5 billion for the investment bank, leading to job losses, resignations, regulatory action, and significant reputational harm. ( BDO)

In fact the exposure was extraordinary considering how small the gains were.

It’s worth noting that Credit Suisse made just $17.5 million in Archegos fees in 2019 for exposure to a potential $20 billion loss (at the peak of the fund’s activities) – suggesting commercial considerations had become entirely untethered from an assessment of risk. ( BDO)

There was also this.

Credit Suisse last year suspended a $10bn suite of supply chain finance funds linked to Greensill, which collapsed into administration amid allegations of fraud. While $7.3bn has been collected, the bank has warned that about $2bn will be difficult to recoup. The decision to make clients shoulder the extra costs has spread further discontent among the funds’ 1,200 investors. ( Financial Times)

That may yet come back to haunt it. If you think those were extraordinary enough then wait until you see this one.

The tuna bonds scandal arose from $1.3bn (£940m) worth of loans that Credit Suisse arranged for the Republic of Mozambique between 2012 and 2016.

The loans were said to be aimed at government-sponsored investment schemes including maritime security projects and a state tuna fishery, located in the capital Maputo.

However, a portion of the funds were unaccounted for, with one of Mozambique’s contractors later found to have secretly arranged “significant kickbacks” worth at least $137m, including $50m for bankers at Credit Suisse meant to secure more favourable deals on the loans, according to regulators. ( The Guardian September 2021)

What caused the memo?

The scandals have been public knowledge for a while now. But things had been singing along with Hard-Fi.

Pressure, pressure, pressure pressure pressureFeel the pressurePressure, pressure, pressure pressure pressure

Or as the Financial Times put it.

Having seen Credit Suisse’s share price drop more than 25 per cent last month to below SFr4, chief executive Ulrich Körner sent a company-wide memo on Friday to try to reassure staff over the bank’s capital position and liquidity.

Indeed the problem with issuing shares is that almost anytime recently would have been a better time to do it.

The collapse in Credit Suisse’s share price is of great concern. From $14.90 in Feb 2021, to $3.90 currently. ( @WallStreetSilv)

So a share issue now would dilute existing shareholders more than three times more than it would have done in February 2021. That would obviously not go down well especially as their job involves giving others advice on what to do about share issuance.

So you can sell something off. The catch with that is you would rather not sell the good bits and nobody is likely to pay much for the bad bits. Which is a circle that is not easy to square.

Credit Suisse has been advertising for partners to suck the marrow from one of its more profitable divisions. Its strategic review plan outlined in July included a promise to “evaluate strategic options for the Securitized Products business, which may include attracting third-party capital” — though its timing here really wasn’t great. ( FT Aplhaville)

Also cheap sales damage the capital position you are trying to strengthen.

A falling valuation for Securitized Products adds extra pressure to Koerner, whose plan is due to be announced at the end of the month. There’s neither much time nor much margin of error. Credit Suisse has a target capital ratio of 13-14 per cent before 2024 and >14 per cent afterwards; tweak a just couple of numbers in the RBC-supplied forecast tables below and capital suddenly becomes the big issue.



I think that it is time for a reminder that interest-rates as in this case ( Switzerland) is a simple case for now of having one are supposed to benefit banks! What we are seeing I think is something I have long warned about which is the consequence of zero and then negative interest-rates if sustained for a long time. Banks cannot make much money out of normal business so they take extra risk. If you want a wry smile then it may not be the best time for the Swiss National Bank to release this working paper.

Systemic bank runs without aggregate risk: how a
misallocation of liquidity may trigger a solvency crisis

Underneath it all is a basic business that is essentially the Swiss one.

a Swiss bank and wealth arm serving rich folk. Doing great ( @goodalexander)

How good? Higher interest-rates will help.

First – the Swiss bank benefits from higher CHF rates (est. +800M/year benefit to 2024 income). It saw +3.4CHF B of net inflows ytd even with 1.9CHF Billion of Russian outflows. The big growth area is China. CS reinvested pnl from higher rates in courting Chinese clients.

The problem is all the other bits. We are back to risk-taking again and the fact that those who advise others have not been very good at it themselves.

In summary. Whilst the core business is fine the add-ons have caused lots of trouble and may affect other banks. But there is also the fact that I was once told about Germany that it will always have 2 banks ( to preserve the illusion of choice). If Switzerland thinks the same that is UBS and Credit Suisse so they will stand behind it.

These things have other consequences though because one of the reasons the Swiss Franc has been so strong is the perception that Switzerland is both stable and well-run.Whereas Credit Suisse seems to have had the financial equivalent of whoever at Manchester United thought it was a good idea for Christain Eriksen to mark Erling Haaland at corners.





The world of negative interest-rates shrinks to just the Bank of Japan

This week has been all about interest-rates and this morning has brought something really rather significant. One of the signals of that sort of thing is that few mention it. So without further ado let me hand you over to Switzerland.

The SNB is tightening its monetary policy further and is raising the SNB policy rate by 0.75 percentage points to 0.5%. In doing so, it is countering the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected. It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term.

One of the main bastions of the icy cold world of negative interest-rates has left the room. To illustrate the road to Damascus style conversion here let me take you back to the 16th of December last year.

The SNB is maintaining its expansionary monetary policy. It is thus ensuring price stability and supporting the Swiss economy in its recovery from the impact of the coronavirus
pandemic. It is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%, and remains willing to intervene in the foreign exchange market as necessary, in
order to counter upward pressure on the Swiss franc.

What a difference 9 months makes. Also I would point out that “ensuring price stability” has in fact turned into this.

Inflation rose to 3.5% in August and is likely to remain at an elevated level for the time being.

Inflation was supposed to be 1%. So we are observing another central banking failure although as you can see partly via the strength of the Swiss Franc Switzerland  has so far avoided the worst inflation excesses seen elsewhere.

Also we see a clear change in the view on the Swiss Franc.

To provide appropriate monetary conditions, the SNB is
also willing to be active in the foreign exchange market as necessary.

So after saying it was too strong at 1.20 versus the Euro it is now too weak at er the much higher 0.95? It is hard to know where to start with that. Still they have foreign currency reserves of 884 billion Swiss Francs so should they start it would be quite some time before the ammunition locker looked empty. There would however be consequences for other markets as they bought large quantities of Euro area government bonds and also hold US equities.

Bank of Japan

By contrast the Bank of Japan announced this earlier today.

The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.


The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

So -0.1% and 0% although even “without setting an upper limit” has perhaps the beginnings of an echo of the Swiss in January 2015.

In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

So 0.25% is the new Zero.

The Yen

This was the state of play.

TOKYO, Sept 22 (Reuters Breakingviews)…….The yen , currently trading around 144 per dollar, is at its weakest since 1998, but more important is the rate of change. It has lost 29% since a peak in December 2020, and is down 47% over the last decade due to two quick, steep corrections in 2012 and 2014, respectively.

That was a curious view from someone with a weak grasp of mathematics because the real move has been this year not in 2012 or 14. Thus their view below is flawed too.

That’s a byproduct of Shinzo Abe’s successful war on deflation

Actually the plunge continued and reached another new low this morning as the Yen adjusted to US interest-rates some 0.75% higher and unchanged Japanese ones. It did not quite make 146 before the Bank of Japan started playing The Stranglers on its loudspeakers.

Something’s happening and it’s happening right now
You’re too blind to see it
Something’s happening and it’s happening right now
Ain’t got time to wait
I said something better change
I said something better change.

Intervention Time

There was an early warning.

Japan Top Forex Diplomat Kanda: There May Be Cases Where We Conduct Stealth Intervention ( @LiveSquawk)

According to IGIndex he added this.


That lasted less than a few hours.



If there is a role of top FX diplomat holders of the role have had an easy life since 1998, but not today. The Bank of Japan surged into the currency markets like a bull in a China shop. Through 145 then 144 and 143. That highlights one of the problems of intervening which is that the professional players will withdraw. You can pick off existing orders in the initial wave but after that there will be some option hedges perhaps ( if you are long option volatility then you owe the Bank of Japan a decent bottle of sake) but not much else.After all why take on a central bank?

This is the problem of intervention as I have pointed out before.In the initial stage the central banker can stride around the ring like a heavyweight champion. Indeed with its 8.9 trillion Yen of foreign currency assets to play with we could say like a super-heavyweight champion. The problem is that like a boxer it will run out of puff as it cannot stay there forever. Its reserves are large but in the end they will decline away. So it will have to pick its punches carefully.

By contrast this remains every single hour of the day.

In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate.  ( Federal Reserve )

So the carry in favour of the US Dollar will be 3% and rising.That creates another problem because say the Bank of Japan flexes its muscles and pushes the exchange-rate to 140.Then the carry deal is even better because you are buying the US Dollar more cheaply.


The US Dollar has been something of a wrecking ball in currency markets in 2022. It has sent pretty much everyone else to multi-decade lows exacerbating their inflation problem due to its role as the reserve currency. We have seen Japan respond today in a curious fashion because actually they dislike negative interest-rates and yet they continue to sing along with Toto.

Hold the line
Love isn’t always on time
Whoa oh oh
Hold the line

The problem is that they now find themselves trying to hold the line at 145 Yen as well. Indeed the central planning is out of control as they set not only interest-rates but bond yields then intervene in the equity market because they think it is too low and now in the exchange-rate because it is also too low for them. Is there anything else left?

Also they did try to get to 140 but look what happens when they step back.


The Bank of Japan is winning the bond war but not the economic one

Last week brought a couple of developments that will have raised a wry smile in the land of the rising sun or Nihon. The first has been the fall in bond yields we have been seeing which picked up pace. In itself that poses a question for central banks that have raised interest-rates and the obvious example is the US Federal Reserve. Over the last 2 policy meetings it has raised its official interest-rate by 1.5% but the benchmark US ten-year yield has fallen by around 0.75%, and is 2.68% as I type this. This poses a question for the US Federal Reserve but also remember that the Bank of Japan is doing this.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero

When we last looked at this the Bank of Japan was singing along with Queen and David Bowie.

Pressure pushin’ down on me
Pressin’ down on you, no man ask for
Under pressure that brings a building down
Splits a family in two, puts people on streets

Which meant that there has been some flexibility applied.

In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

In practical terms the Bank of Japan was holding the line at a yield of 0.25% rather than 0%.

But this morning the picture looks different to when we were noting an array of hedge funds surrounding the Bank of Japan looking to break the Yield Curve Control threshold. Here is Bloomberg on the state of play from last week.

BlueBay Asset Management is committed to its bet against Japanese bonds despite a global debt rally that has led to a sharp retreat in yields…….“As at this morning 10-year yields are at 0.21%,” he said Tuesday. “We entered the position at 0.23% so truthfully speaking nothing has really happened.”

This morning it is at 0.18% and is more significant than they are letting on. This trade has been called the “Widowmaker” for good reason although the loss so far is as much as in capital tied up rather than large losses.

The Yen

The Bank of Japan will be pleased about this although there is a nuance.

LONDON, Aug 1 (Reuters) – The U.S. dollar sank to its lowest in more than six weeks versus the Japanese yen on Monday……….The dollar sank to its lowest level versus the yen since mid-June at 132.07 , down more than 5% from a late 1998 peak of nearly 140 yen hit last month.

It will not have liked the way that the fall became a rout at times but of course under Abenomics a lower value for the Yen was effectively an “arrow” of policy. The irony was that after the initial falls not much happened and at times we saw Yen strength such as the “flash crash” to around 103.


Reuters got rather excited about the latest numbers.

Japan’s core consumer inflation remained above the central bank’s 2% target for a third straight month in June, as the economy faced pressure from high global raw material prices that have pushed up the cost of the country’s imports.

But it was a number other central banks can only dream of presently.

The nationwide core consumer price index (CPI), which excludes volatile fresh food costs but includes those of energy, rose 2.2% in June from a year earlier, government data showed.

The headline at 2.4% was as you can see very little different and even dipped slightly on last month. So the Bank of Japan is after many years actually pretty much on target. But it took a surge in energy costs and a currency fall to get there.

With the producer price index having been over 9% for all of 2022 so far I think it is reasonable to question the numbers? But the official series has not moved much.

Real Wages

The wages series suggests a typical monthly wage of around 277,000 Yen but we get a reminder of one of the major players in the “lost decade” period as we note it is only up by 1% on a year ago. The highest paid group is the information and communication sector at 448,000 Yen and the lowest the hospitality sector at 127,346.

The real wages series tells us that they were some 1.8% lower in May than a year before. This is a regular drumbeat for Japan and I will return to it.

The Economy

Bank of Japan Deputy Governor Iwate-san told us this on Thursday.

In terms of the medians of the Policy Board members’ forecasts, Japan’s real GDP growth rate is expected to be at 2.4 percent for fiscal 2022, 2.0 percent for fiscal 2023, and 1.3 percent for fiscal 2024.

Not stellar levels but well above its potential.

As Japan’s recent potential growth rate is estimated to be
in the range of 0.0-0.5 percent, the forecasts show that the economy is projected to continue
growing at a pace above its potential growth rate for four consecutive years when including
fiscal 2021.

Also Japan has lagged its peers.

The level of GDP is expected to recover to the pre-pandemic level (the 2019
average) around the second half of this fiscal year. However, the pace of recovery has been
slower than in Europe and the United States

The issue I have is the supposed logic for the recovery now. Japan’s producers will be affected by the rises in costs especially energy ones.

Japan is battling its worst energy crisis in recent history that has exposed its energy security vulnerability, as scorching weather and surging oil and gas prices have led to spiking electricity rates, prompting calls from the Japanese government for residents to conserve power. Japan is extremely dependent on imported energy, with more than 90% of domestic consumption reliant on foreign oil and gas……..and Moscow’s shock nationalisation of the Sakhalin 2 LNG and oil project in the Russian Far East. ( Natural Gas News)

Could there be rationing? One response has been the re-opening of some nuclear plants.

Also the rise on employee income is not coming from real wages as we have already seen.

Meanwhile, employee income has improved moderately, reflecting rises in the number of
employees and wages associated with a recovery in economic activity. Such improvement
in employee income is projected to continue; supported by this, private consumption is
expected to keep increasing steadily from fiscal 2023 onward, although the pace of
materialization of pent-up demand is likely to slow.


There is so much here that is typically Japanese. They have stuck to their guns on monetary policy and whilst official interest-rates have left then increasingly lonely in the icy cold world of NIRP with a rate of -0.1%, bond yields have gone their way. With its large equity holdings the Bank of Japan in its alter ego of The Tokyo Whale will be pleased to see the Nikkei-225 just below 28,000. I am not sure they know what their Yen policy is now? But they will not have liked the fast falls so that has improved too.

The problem comes with the real economy and let me return to the subject of real wages and this analysis from The Japan Times from February.

On top of deflation, many economists claim that Japan’s sluggish wage growth is linked to a soaring number of part-time and contract workers over the last few decades.

Companies use such workers to save costs. Full-time employees are heavily protected by law, so employers hired more and more part-timers and contract employees as they are easier to lay off when times are tough.

In the early 1990s, part-time and contract workers comprised about 20% of the total employed workforce, a figure that shot up to 36.7% in 2021.

There is a huge wage gap between employees with full-time contracts and those without, so the increase of part-time and contract workers drags down the growth of Japan’s average salaries overall.

However you spin it there is an issue here which undercuts a Japanese success story which is the low unemployment rate.



Why is the Euro exchange-rate so weak?

The economic features of 2022 have consequences for exchange rates and this morning has brought us closer to a symbolic event. You do not need to take my word for it as here after a curious period of silence on the subject is Financial Times markets editor Katie Martin on the subject at hand.

the technical term for EURUSD here is Squeaky Bum Time. parity watch is ON

It has fallen to below 1.01 versus the US Dollar after starting the week above 1.04 so it has been a week that Hard-Fi would describe like this.

Can you feel it?
Feel the pressure… rising
Pushing down on me, oh lord!
Pressure, pressure, pressure pressure pressure
Feel the pressure
Pressure, pressure, pressure pressure pressure

It would be the second time for people to wear their parity hats this week as after a period of dancing around parity the Euro moved to below 1 more decisively versus the Swiss Franc and is now at 0.9874. I will return to it as there are important signals and lessons here with regular readers no doubt already thinking of both the Carry Trade and the period when the Swiss National Bank promised “unlimited” foreign exchange intervention at 1.20 before eventually folding like a deckchair.

One issue I will point out is that markets often move to a level like this and fail first time around before moving when mainstream attention has departed. Not this time though.

Why is this happening?

One clear factor is relative interest-rates. James Bullard of the St.Louis Fed said this yesterday.

With respect to the policy rate: The FOMC has increased the rate’s level at the last three meetings and is poised to make further increases at coming meetings.

The bond market is suggesting that they will raise towards 3% so for foreign exchange purposes that will be what you are thinking. Now let us switch to the ECB. Here we start with a problem because in spite of inflation being above 8% it has not raised interest-rates and still has one of -0.5%. All we have so far are promises.

Second, monetary policy normalisation in the euro area was expected to proceed at a significantly faster pace than at the time of the Governing Council’s 13-14 April meeting, with a rate lift-off expected in July.  ( ECB Minutes released yesterday)

But a 0.25% rise would be both slower than the US and still leave interest-rates in negative territory. If we switch to bond markets we see that the ten-year yield in Germany is 1.25% reflecting I think the view on ECB interest-rate policy. As Oasis would put it Definitely Maybe.

Next up is the wider issue of ECB credibility being low and an example of this has come from a past policymaker former Vice-President Vitor Constancio.

There is already a lot of noise around the exchange rate EUR/USD going to 1. However, what matters for competitiveness and import prices is the trade-weighted effective exchange rate v. main trade partners. Since Dec. the EURUSD is down 9%, but the effective rate is down only 2%.

If you think it through that is worse rather than better. The Euro has fallen against the US Dollar which will raise inflation via energy costs. The ECB Minutes did refer to this issue.

Since May 2021, oil prices had increased by 88% in US dollar terms but by 111% in euro terms.

At the same time it has rallied versus the currencies the Euro area trades with thus worsening the position there too.

Also in terms of psychology the release at the beginning of the week suggested an organisation unable to concentrate on its main task which is inflation.

The Governing Council of the European Central Bank (ECB) has decided to take further steps to include climate change considerations in the Eurosystem’s monetary policy framework. It decided to adjust corporate bond holdings in the Eurosystem’s monetary policy portfolios and its collateral framework, to introduce climate-related disclosure requirements and to enhance its risk management practices.

If we return to the economics there is also the influence of this.

The euro area goods trade balance had deteriorated owing to the rising cost of imported energy and food. The overall trade balance had deteriorated by about 4 percentage points since the start of 2021, of which about 2.5 percentage points was due to the energy and food balance. This captured the real income cost of having to pay more money to the rest of the world. ( ECB Minutes)

We gad become used to what was essentially the German trade surplus providing support for the Euro but it is no more.

The Swiss Franc

We can move on from the issue of the US Dollar which has been something of a bulldozer this year as it rolls over other currencies and switch to the Swissy for both a regional and relative comparison. This is in spite of the fact that it is becoming increasingly clear that they nave been making the same mistakes as the rest of us.

Moreover, Swiss politicians have failed in recent years to push ahead with the expansion of energy facilities that would reliably supply power in the winter – despite repeated warnings from Elcom, the regulatory authority. ( azz.ch)

But the Swiss National Bank did act on the 16th of June.

We have decided to tighten our monetary policy and to raise the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to −0.25%. In doing so, we are seeking to counter increased
inflationary pressure.

It also came with something of a U-turn on the subject of the Swiss Franc exchange-rate.

Since the last monetary policy assessment, the development of the Swiss franc exchange rate has also contributed to the rise in inflation. The Swiss franc has depreciated in trade-weighted terms, despite the higher inflation abroad. Thus the inflation imported from abroad into Switzerland has increased.

So the former currency devaluer is now in favour of currency appreciation! Whilst circumstances do change there is no mechanism for central planners like these to ever be challenged or brought to heel. What about the enormous US equity position that they have or the even larger one in European bonds?

So the SNB is now persuaded of the virtues of a strong currency.


The currency issue often gets ignored but I look at it regularly because whilst moves are sometimes symbolic it is also true that not only are genuine economic forces often at play it can also drive them. We have been following the decline in the Japanese Yen for a while now and it reached 136 again versus the US Dollar overnight. I think with the Euro joining it we have an interesting situation as these were both places with a strong trading position which supported the currency. Ironically that was part of the reason why they ended up with negative interest-rates. So far that continues to look like this.

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

The problem is that the weaker currency adds to the issue of inflation especially as it is versus the US Dollar.

Anyway as the chart below shows it is not how things are being reported in the UK with the media trying to tout the UK Pound £ as an emerging market currency. Which one looks like that below?


Japan stands firm against the tide of rising interest-rates

The central banking news has come thick and fast this week.We knew from the schedules that several meetings were due but as we looked forwards we did not necessarily always know the importance.One thing we have definitely learned this week is that my theme that central bankers are pack animals continues but that they have split into two distinct packs and today we are looking at the one which involves both Japan and the Euro area.

Bank of Japan

Policy here has been under threat as a hedge fund has been taking on the Japanese Government Bond market by selling JGBs and looking to get the ten-year yield above the 0.25% limit imposed by the Bank of Japan. Blue Bay have posed a direct challenge to Yield Curve Control and had some success as the yield target was breached earlier this week and the Bank of Japan was forced to buy 2.2 trillion Yen of JGBs to reinstate it.

Yesterday the temperature was heated up by reports like this.

10Y JGB yeilding 0.45%, “coups d’état” on Kroda inside the BOJ right now. ( @ForexSmile )

Firstly it is Kuroda and secondly that always looked like a bum print from Trading View. Those running with such thoughts will have run into this today and the emphasis is mine.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero
b) Conduct of fixed-rate purchase operations for consecutive days
In order to implement the above guideline for market operations, the Bank will offer to purchase 10-year JGBs at 0.25 percent every business day through fixed-rate
purchase operations, unless it is highly likely that no bids will be submitted.

So The Tokyo Whale really intends to live up to its name. As the Keiser Chiefs put it.

Knock me down I’ll get right back up again
Come back stronger than a powered-up Pacman

Following the statement Governor Kuroda has sounded like a man who is digging in the trenches rather than planning to leave them.


Then even more so.

BoJ Gov Kuroda: Raising Implicit Cap For 10-Year JGB Yield Target Would Weaken Economy ( @LiveSquawk )

And then finally via forexlive

BOJ’s Kuroda says will not hesitate to ease monetary policy further if necessary.

Actually he is hyping things up there because the Bank of Japan is heavily involved in buying bonds ( QQE) and Japan Inc was never keen on interest-rates going below -0.1%,because if they were it would have done.

Early Wire?

One of the dangers of central planning is that some end up being more equal than others. I point this out because other bond markets rallied yesterday afternoon. Whilst it may have been reasonable to guess what the Bank of Japan would do it was a strong move in the reverse direction to the volley of interest-rate increases that we had seen this week.


The Japanese situation is different to others in many ways but the big difference right now is this.

On the price front, with the effects of a reduction in mobile phone charges dissipating, the year-on-year rate of change
in the consumer price index (CPI, all items less fresh food) has been at around 2 percent, mainly due to rises in energy and food prices.

The statement rather confusingly excludes and then includes fresh food! But so far Japan has what both its central bank and government wants which is inflation at 2%. Care is needed with this on several fronts. Firstly there are the power problems we have previously looked it which may push it even higher as we enter the air conditioning ( it gets very hot and humid) season. Also Governor Kuroda has already felt pressurised enough to apologise for higher inflation. Lastly it is my opinion that rather than being a solution to the lost decade problem it will make it worse via the impact on one of its main features which is the struggles of real wages.


The messages coming out of the ECB are to say the least confused. That is a little awkward for President Lagarde who of course has just received an honorary doctorate, but promised at the start of her reign to end the squabbles and leaks leading to “sauces” in the media. But the ECB does have a direction of travel and that is in line with today’s command and control theme.

European Central Bank President Christine Lagarde told euro-area finance ministers that the ECB’s new anti-crisis tool will kick in if the borrowing costs for weaker nations rise too far or too fast, according to people briefed on their discussions.  ( Bloomberg)

She then went further down that road.

She said the instrument may be triggered if bond spreads widen beyond certain thresholds or if market movements exceed a certain speed. Lagarde did not specify whether those limits would be made public.

Maybe someone should have told the Governor of the Bank of Italy not to tell anyone about the limits.

“A differential in the yields of 10-year Italian and German bonds of less than 150 basis points would be justified by the fundamentals,” Visco told a conference. “Levels above 200 points are certainly not.” ( Reuters )

It is right on the upper limit as I type this (2%) but the confused messaging led to a lot of trouble in the German bond market yesterday. The view got around that there could be selling of German bonds to buy Italian bonds so that the ECB could claim its moves were neutral. There are issues with this from the German point of view for obvious reasons highlighted by their bond future falling by 4 points at the worst point of the panic. So some will have been stopped out of what is supposed to be the safe haven of European bond markets. So genuine losses were created by the confused messaging. Actually it is more than the messaging as the plan is merely a wish list at this point.

So we see actual losses created by the involvement of the ECB and frankly policymakers who know nothing about bond markets. Supporters of such policies dismiss this as being about speculators and even “financial terrorists” ignoring the fact that people’s pension funds are involved here.


Who is she to define bond market moves as “irrational”? She of course has plenty of experience of crises which sounds good until we recall her role in creating them.

Meanwhile this particular salmon seems to be trying to swim in the other direction.


Just as a reminder here is the total increase in interest-rates in the last decade 0%.


We end what has been a tumultuous week with central banks having split into two packs. Indeed you could argue with its interest-rate open mouth operations that the ECB is trying to keep a foot in both camps as well as sometimes one in its mouth.

The present leader of the pack is the Bank of Japan which demonstrated irs devotion to the cause by buying some more equities today.


For them it is always Queen on the loudspeakers.

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity
I’m a racing car passing by like Lady Godiva
I’m gonna go, go, go
There’s no stopping me


Central Banks are starting to press the panic button

Today looks set to be quite a day and it is only 9 am. Already quite a few of our themes are in play as the central banking world turns things up to 11 in Spinal Tap terms. So let us get straight to this morning’s announcement via what I have called their house journal the Financial Times.

The ECB said: “The governing council will have an ad hoc meeting on Wednesday to discuss current market conditions.” The meeting is scheduled to start at 11am CET.

Even the house journal cannot avoid pointing out that the timing is awkward.

The move, which comes less than a week after the rate-setting governing council’s last vote, has raised investor expectations that the central bank is preparing to announce a policy instrument to stave-off another debt crisis in the region.

So we find that the open mouth operations of last Thursday have not gone well. There is an element of history repeating itself although of course this time around President Lagarde avoided saying “We are not here to close bond spreads”. However this time the situation is worse for two reasons of which the first is that due to Covid Italy has borrowed even more. Secondly the bond yield has gone above 4% this time (4.28% was the peak yesterday according to my chart), whereas last time it was 3%.

So we have a full-blown sovereign bond crisis in the Euro area a decade after the last one and it is on a fault line that has frequently troubled us which is Italy. One reason for that is the fact that it is the largest Euro area bond market so any “rescue” has to be in very large size unlike say Greece which was large for it but not in terms of Euro area resources.

The response looks set to be along the lines we looked at on Monday of last week.

Even without a new scheme, the ECB already has an additional €200bn to spend on purchasing stressed government debt under its existing bond-buying programme. That €200bn would come from bringing forward reinvestments of maturing assets by up to a year.

This begs two immediate questions. Why they did not start from last Thursday’s policy meeting? Perhaps things were not as “unanimous” as we were assured by President Lagarde. Also it would be an extraordinary move for all PEPP reinvestments to go to Italy so maybe they could manage 100 billion Euros which is not a small sum but it is a lot smaller than the 2.7 trillion or so of Italian government debt.

Also we have two further issues. One is the leaking of central banking plans to the press in the form of flying a kite because the US Federal Reserve has also done that. The other is that this is happening on Federal Reserve day showing that the ECB has panicked at what it things is the last moment.

Bank of Japan

Here we have a currency plunge ( it has now gone through 135 to the US Dollar) but the main feature this week is the extraordinary effort in terms of QE bond buying by the Bank of Japan.

The 10-year bond yield on Monday breached the BOJ’s policy band of 0.25% even though Kuroda had committed to buy an unlimited amount to hold it down. The central bank initiated a hasty, unscheduled purchase programme that stabilised the market. ( Reuters)

We are in almost uncharted territory here.

It bought a record 2.2 trillion yen of bonds yesterday, surpassing the previous high in 2008 ( @LisaAbramowicz1)

I can think of two comparisons of which one was when the Swiss National Bank promised to defend 1.20 versus the Euro with “unlimited” foreign exchange intervention and then in January 2015 was defeated. Actually as one US hedge fund seems to be leading the attack then there a similarities when George Soros “broke” the UK Pound in 1992. But of course these are foreign exchange markets rather than a bond one.

So we are in a curious situation where at the time of interest-rate rises and dare I say it “normalisation” ( end of QE bond purchases and interest-rates heading to around 2.5%) we have two major central banks heading in the opposite direction. The ECB is about like the mythical figure Janus as it promises to raise interest-rates on Thursday but looks set to add to QE bond buying less than a week later.

US Federal Reserve

This is the main player here resulting partly from its role as the world’s main central bank via the role of the US Dollar as the reserve currency. This has been seen in two ways in recent times. Back in March 2020 the Federal Reserve had to step in via the use of foreign exchange swaps to stop a liquidity crunch. More recently the rise of the value of the US Dollar has increased inflationary pressure for everyone else as they have to get dollars to but commodities.

Things were quiet with the consensus being a 0.5% interest-rate rise at 7 pm tonight and then this happened.

A string of troubling inflation reports in recent days is likely to lead Federal Reserve officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest-rate increase at their meeting this week.

Before officials began their premeeting quiet period on June 4, they had signaled they were prepared to raise interest rates by a half percentage point this week and again at their meeting in July.  ( Wall Street Journal)

We do not know yet whether the author Nick Timoraos is a replacement for John Hilsenrath who previously had the ear of the Federal Reserve? But markets have decided to take it seriously which is why extra pressure has mounted on the Bank of Japan via its bond market and the Yen and on the ECB via the Italian bond market.

Let me give you a real world example of the impact in the US.

The velocity of this move has been staggering: 30 Year fixed mortgage rates at 6.28% versus 5.50% last week ( @Stephanie_Link)

Bank of England

They vote later and if they have any sense they will wait for the US Federal Reserve. In fact if they have even more sense they should announce their move then as well.

The issue for the UK is that the UK Pound £ has been under pressure versus the US Dollar and fell below US $1.20 yesterday for a while. This adds to the inflationary pressure. For the Bank of England this means that their plan to raise in 0.25% increments looks even more out of touch. Already it was unlikely to do much about inflation but now seems unlikely to support the Pound £ either.

I was thinking even before this that 0.5% may be more sensible and now if they wish to match the Fed they may be pressurised into a 0.75%.

Regular readers will be aware that I have long expressed an interest in the rule of thumb which compares changes in the level of the Pound £ with changes in interest-rates. Oh how the Bank of England must be wishing right now that it had also done so.


There are lots of echoes here. One is historical because when the UK was forced out of the ERM in 1992 Italy was under pressure too. Unlike the UK  there was support for Italy and it stayed and joined the Euro. The stress points are similar as we have seen the UK Pound £ under and the Italian bond market diving. The change has been that the UK bond market has been in line with others breaking one link in the chain. But many things are the same and the Euro may also see pressure although it is helped by having other members.

The US is suffering from dithering about interest-rates and is now seemingly in a state of panic. That is ricocheting around the world and creating all sorts of financial pressures and another major one is the decline of Bitcoin to US $20,000. There is a lot of pain in some markets leading to the danger that something may break so as they used to say on Hill Street Blues.

Let’s be careful out there

The ECB gets ready for QE to infinity with its bond buying plans

Sometimes events come together in a curious way. Regular readers will know that I have used the phrase below to describe my theme on ECB policy.

To Infinity! And Beyond!

Only last week the adverts on Spotify were plugging a new film featuring Buzz Lightyear and this morning the Financial Times has this.

The European Central Bank is this week set to strengthen its commitment to prop up vulnerable eurozone countries’ debt markets if they are hit by a sell-off, as policymakers prepare to raise rates for the first time in more than a decade.

We see that in ECB week ( its policy announcements and statement are due at Thursday lunchtime) it is leaking to its house journal. However there is something of a swerve in this to say the least. As recently as the 25th of May policymaker Fabio Panetta was reinforcing the end of QE.

This is the position of the ECB. We currently intend to end net asset purchases in the third quarter.

This now has morphed into this according to the FT.

The bulk of the 25 governing council members are expected to support a proposal to create a new bond-buying programme if needed to counter borrowing costs for member states, such as Italy, spiralling out of control, according to several people involved in the discussions.

As a first point I remember President Lagarde promising she would stop what has become called “sauces” leaking to the press, whereas it is now rife. So rather than the end of QE bond buying we seem to be following a Churchillian style phase.

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.


Before the long Jubilee weekend I pointed out this.

Bloomberg’s bond market liquidity index picks up kinks in the yield curve that signal poor liquidity. Those kinks are worse & worse for Italy as we approach ECB hikes ( Robin Brooks)

On Wednesday the ten-year yield for Italy was 3.1% whereas this morning it is 3.36%. Thus ECB fears have been heightened about the Euro area’s largest bond market. This will be added to by the fact that they would not want their previous President presiding over a bond crisis in his present role of Prime Minister of Italy.

There was a link to this in the Fabio Panetta speech for the observant and informed.

First, the size of our balance sheet is already expected to significantly shrink and its composition will change as the TLTROs are wound down, ultimately leading to a reduction of around €2.2 trillion in excess liquidity.

Back when these were enacted the Italian banks took some of this liquidity and invested it in Italian government bonds. This was convenient for the ECB at the time. This merger of credit easing and implied QE has a problem though and we are back to the QE to infinity issue. When it ends the banks will presumably sell the bonds reversing the previous support for the market. If things were better then that is fine but as the quote from Robin Brook’s shows the situation has if anything got worse. Italy as of March had a national debt that nudged over 2.75 trillion Euros.

Back in February BNP Paribas pointed out this.

Italy’s public debt has jumped markedly as a result of the Covid-19 crisis, an increase of around 20 points of GDP over the past two years, which brings the ratio to 150% today. Italy remains the second most indebted country in the euro zone after Greece.

It is revealing that they mention Greece but they are not clear because they mean  relatively indebted. The difference as I have pointed out many times over the past decade or so is the size of the Italian national debt which was material back then and is even more material now. Or if you prefer the third largest economy has the largest debt. Covid has made this worse with the extra borrowing and now as we looked at last Wednesday stagflation is on the menu.

Bond Yields

These do get a mention in the FT.

The spread between Germany’s benchmark 10-year bond yield and that of Italy — a closely watched yardstick of financial stress in the eurozone — rose last week to its highest level since a sell-off in southern European bond markets at the start of the pandemic in 2020.

In itself that may simply reflect the fall in ECB QE bond buying but the FT has missed a nuance. You see even Germany is having to pay for its debt now with a ten-year yield of 1.3% as I type this. So the Euro area rescue vehicle called the European Stability Mechanism has to pay too.

The no-grow 1% 23 June 2027 bond

That was from mid May so it would be a fair bit more expensive now. Thus allowing for a margin any support borrowing would be more expensive.

There is a sort of irony as the ECB has to some extent done this to itself.

Many of the council’s hawks have accepted that they will need to provide more support for bond markets to clear the way for being more aggressive in raising rates.

This is because this has so far been a case of open mouth operations as the ECB has not raised interest-rates for over a decade. So what is “more aggressive”? It has tried to manage expectations like this.

A rise of at least 25 basis points is all but certain to happen at the ECB’s next policy meeting on July 21

This is because it is playing Fleetwood Mac on repeat.

I been alone
All the years
So many ways to count the tears
I never change
I never will
I’m so afraid the way I feel

Moving the goalposts

The FT is not covering itself in glory here as it tries to claim this is the central banking equivalent of finding some money down the back of your sofa.

Even without a new scheme, the ECB already has an additional €200bn to spend on purchasing stressed government debt under its existing bond-buying programme. That €200bn would come from bringing forward reinvestments of maturing assets by up to a year.

Whereas it is simply a rather desperate attempt to claim they have 200 billion Euros to spend which rather falls down when you are reinvesting money you do not have yet. This returns us to an issue I pointed out earlier which is that these things rely on a better period coming to which you kick the can ( the poor battered can) except it has yet to arrive.


This shows a change which will give ECB President Christine Lagarde some food for thought.After all she once thought this.

Lagarde said: ”We are not here to close spreads, this is not the function or the mission of the ECB. There are other tools for that and there are other actors to actually deal with those issues.”  ( MarketWatch 12th March 2020)

Which has now become this.

 “If necessary, we can design and deploy new instruments to secure monetary policy transmission as we move along the path of policy normalisation, as we have shown on many occasions in the past.”

Sadly for her she is not capable of the Jedi-Mind Tricks of her predecessor Mario Draghi who never had to deploy these.

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above.

As the never happened perhaps the ECB has forgotten what was planned or it was just a mind trick.

After all this you might be wondering why the ECB is doing this? It is simply that it has an expansionary monetary policy with a -0.5% interest-rate and ongoing QE with inflation at 8.1%. So a -8.6% real interest-rate. Added to that President Lagarde’s description of it as a “hump” is not going well.

In April 2022, industrial producer prices rose by 1.2% in the euro area and by 1.3% in the EU, compared with
March 2022, according to estimates from Eurostat, the statistical office of the European Union….In April 2022, compared with April 2021, industrial producer prices increased by 37.2% in the euro area and by 37.0% in the EU.

Euro area economic figures suggest trouble ahead

The last 24 hours or so have brought news of the economic clouds darkening over the Euro area. We can start with La Belle France where it turned out that the past was not what had been claimed.

In Q1 2022, the decline of GDP in volume terms* (-0.2% in Q1, after +0.4% in Q4 2021) was linked to the weakness of household consumption (-1.5% after +0.3%), particularly in transport equipment (-2.3% after -0.9%), other manufactured goods (-2.1% after -0.6%) and in accommodation services and restaurants (-3.9% after -0.9%) ( Insee )

So the economy shrank which was not what we were initially told ( 0%) and President Macron must be grateful that the news was after the elections. His opponent less so. The theme of household consumption being weak feeds into the cost of living crisis and I will return to it later. The other declines are not a surprise to us although the manufacturing one will be one to the Markit PMI series which keeps producing numbers claiming growth. From an hour ago.

The French manufacturing sector is just about
managing to stay in growth territory, but the current
pace of expansion is sluggish amid a multitude of
economic headwinds to the industry.

These numbers are catching up with reality with their rhetoric of “economic headwinds” but they have been around the mid 50s this year suggesting pretty decent growth which does not convince me.

Returning to the official data this was troubling.

final domestic demand excluding inventories contributed negatively to the evolution of GDP, by -0.6 points (after +0.2 points in the previous quarter).

Backed up by this where GDHI is Gross Household Disposable Income .

At the same time, the households’ consumption prices accelerated (+1.3% after +0.8%). As a result, the purchasing power of GDHI fell sharply this quarter (-1.8% after +1.1%). Measured by consumption unit to bring it at an individual level, it fell by 1.9% (after +0.9%).

So domestic demand was lower and with disposable income falling that seems logical. Looking ahead the disposable income situation looks set to get worse because there is no great sign of wages rising but inflation has.

Year on year, the Harmonised Index of Consumer Prices should rise by 5.8%, after +5.4% in April. Over one month, it should increase by 0.7%, after +0.5% in the previous month.

So there is a downwards push coming from the cost of living. Before we move on last year was revised lower too.

Annual growth for 2021 has also been revised by -0.2 points (+6.8% instead of +7.0%) as well as its quarterly profile: revisions of +0.1 points in Q1 2021, -0.5 points in Q2, +0.2 in Q3 and -0.3 in Q4.

This affects the trajectory for this year and numbers produced by the IMF and the like.

 led to a marked revision of the growth rate overhang for 2022: at the end of the first quarter, it now stood at 1.9%, compared with 2.4% in the previous estimate.


I did say that I would return to the issue of domestic consumption and here is this morning’s news of a component of it from the largest Euro area economy.

WIESBADEN – According to provisional results of the Federal Statistical Office (Destatis), the real (price-adjusted) turnover of retail enterprises in Germany was 5.4% and the nominal (not price-adjusted) turnover was 4.7% lower, on a calendar and seasonally adjusted basis, in April 2022 compared with March 2022.

That was quite a sharp fall and as someone who has long argued ( since January 29th 2015 if you wish to look it up) that high inflation reduces retail sales, it is nice to see Germany’s statistical office agreeing with me. The emphasis is mine.

In April 2022, the retail food trade recorded a real drop in sales of 7.7% compared to the previous month. This was the biggest drop in sales compared to the previous month since the start of the time series in 1994. Compared to April 2021, sales fell by 6.5%. This development is probably due to the significant rise in food prices (+8.6% compared to the same month last year)

Looking through the figures the falls seem pretty broad based.

Trade in textiles, clothing, shoes and leather goods as well as department stores and sales outlets recorded a significant drop of 4.3% and 7.0% respectively .

Whilst the news for the online world was better that suggests that the high street is in bad shape there too.

In April 2022, online and mail-order retailing achieved a sales increase of 5.4% compared to the previous month.

This is an interesting view on the impact ( price elasticity ) of the rises in fuel costs and I am assuming they mean April.

While sales at (independent) petrol stations in March fell compared to the previous month due to the significant rise in fuel prices,


This should not have been a surprise after Monday’s hints from Spain and Germany but some did not seem to update their thoughts after them.

Euro area annual inflation is expected to be 8.1% in May 2022, up from 7.4% in April according to a flash estimate
from Eurostat, the statistical office of the European Union.

That is four times the ECB target of 2% and is broken down below.

Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in May
(39.2%, compared with 37.5% in April), followed by food, alcohol & tobacco (7.5%, compared with 6.3% in April),
non-energy industrial goods (4.2%, compared with 3.8% in April) and services (3.5%, compared with 3.3% in April).

The first point is that every sector saw faster inflation. I think there is even a lesson from the slowest category which is services. You see it has been holding the numbers down and at 41.6% of the index is a substantial brake. However those who have studied the 70s and 80s will know that inflation like this spreads and it has been ticking higher. After all 3.5% would have been considered well over target before this phase.

In an average some will be higher and indeed lower but the 20.1% of Estonia must be causing real pain. Also for a different reason ( it’s lost decade) so must the 10.7% of Greece.


The situation has turned into the stagflation that I have been warning about all year and in the case of France maybe worse as it may be in recession. Of course it may be marginal but this is very different to what the official bodies have been telling us. The Bank of France has kept forecasting growth.

As to the ECB and monetary policy there is this.

The latest all-time high for euro-zone inflation strengthens the case for the ECB to lift interest rates by a half-point in July, Governing Council member Robert Holzmann says ( Bloomberg)

The problem is that it has got its timing all wrong. If you wished to reduce inflation you needed to start last summer when of course they were pushing the view that inflation was transitory. Now at least some of them are pushing for interest-rate rises just as the economy is plainly weakening. Plus bond yields are higher now especially in the place most exposed.

Bloomberg’s bond market liquidity index picks up kinks in the yield curve that signal poor liquidity. Those kinks are worse & worse for Italy as we approach ECB hikes ( Robin Brooks)

The ten-year yield in Italy is 3.1% and whilst this is much lower than the Euro area crisis and the government can pay because much of the debt is reduced in real terms by inflation, workers and consumers are getting no such relief.

The ECB conducts open mouth operations about at an interest-rate rise

I started this week looking at Japan with its depreciating currency and its unwillingness to raise interest-rates. There was confirmation of the latter point yesterday and indeed this morning.

TOKYO, April 20 (Reuters) – The Bank of Japan on Wednesday boosted efforts to defend its yield target, making a fresh offer to buy an unlimited amount of the 10-year bonds for four consecutive sessions.

So it continues to cap its benchmark bond yield at 0.25%. We can move on to a place that increasingly looks like it is turning Japanese which is the Euro area. This morning ECB Vice-President de Guindos has been conducting some open mouth operations via an interview with Bloomberg. They have summarised it like this.

The ECB should be able to phase out asset purchases in July to pave the way for an interest-rate increase as early as that month, according to Vice President Luis de Guindos.

Actually that is not quite what he said and indeed some of what he said was contradictory so let us take a look.

Our prediction was for growth of a little more than 4% this year, and an inflation rate that was clearly on the rise. We had underestimated inflation for a period of time.

If he believed that then they should have raised interest-rates in response but sadly the journalists missed that point. If not then now.

The consequences for inflation are quite clear. Inflation is accelerating because of energy prices, commodity prices and supply bottlenecks. But simultaneously we’re seeing a reduction in growth through a deterioration of trade. The message is crystal clear in this respect – we’ll see higher inflation and lower growth

But he is already deferring things by apparently claiming he cannot think ahead now and has to wait.

That should be reflected in our June outlook.

So we have our first cautionary point which is after not acting before he is not going to act with inflation over 7%. Which really rather begs the question of what would make him act as he is supposed to aim at 2% and the forecasts he is waiting for have gone badly wrong.

We had underestimated inflation for a period of time.

If the APP ends in July, is a rate increase possible in July as well?

This question actually got him moving away from a July interest-rate rise.

But we need to keep in mind that we have now clearly delinked the end of the APP to the first rate hike, so a rate hike doesn’t need to come automatically once the APP ends. We can have some time in between and we are data-dependent.

Again let me make the inflation point if not at 7% what inflation data is he dependent on? When pressed he also shifted to September.

It will depend on the data we see in June. From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide.

Actually if we look at his inflation view then there will be less reason to raise interest-rates then than now.

We believe we are getting closer to the peak. Inflation will start to decline in the second half of the year. But even so, it will be above 4% in the final quarter.

So 7% is not enough but 4% is?! As OMC put it.

How bizarre
How bizarre, how bizarre
Ooh, baby (Ooh, baby)
It’s making me crazy (It’s making me crazy)

What about a recession?

It was interesting that he found himself having to deny there would be a recession.

A technical recession – two quarters in a row of negative growth –, is not currently part of our projections.

Indeed he was also trying to dismiss the idea of stagflation.

If we define it as negative growth year-on-year with very high inflation, then even in the severe scenario, we do not see stagflation.

As you can see he has given himself so elbow room by defining it as an annual fall in output which is not the definition at all as the “stag” bit makes clear.

He is unable to avoid pointing out that things are getting worse.

But simultaneously we’re seeing a reduction in growth through a deterioration of trade.

That was reinforced by the German export figures released earlier.

WIESBADEN – In March 2022, exports from Germany to countries outside the European Union (third countries) fell by 7.2% compared to February 2022, after calendar and seasonal adjustment.

The main player was this.

Compared to March 2021, German exports to the Russian Federation fell by 57.5% to 1.1 billion euros as a result of the sanctions imposed against Russia because of the war in Ukraine,

In case you were wondering about trade with Ukraine we only get the ten largest trading partners at this stage so we merely know it was not one of them.

Actually things are worse than he is saying which he revealed inadvertently.

The longer inflation remains high, the higher the possibility of having wage indexation clauses in the collective bargaining process. We have not seen much in terms of wage increases so far in Europe.

As we note this morning’s inflation release we see that real wages are falling quickly. Certainly by 3% per annum and maybe more.

The euro area annual inflation rate was 7.4% in March 2022, up from 5.9% in February. A year earlier, the rate was 1.3%.

That is a road to nowhere on which we could easily see a contraction and perhaps a recession.Also in something of a perversion of their role they will respond if they see wages rise in a sort of echo of the words of Governor Bailey of the Bank of England that so backfired on him.

The main risk is that this type of inflation starts to be more and more persistent and gives rise to second-round effects. We need to monitor this very, very closely.

More! More! More!

Overnight we heard this from another ECB policymaker.

The European Central Bank could lift policy rates above zero before the end of the year unless the euro-zone economy suffers a severe shock, and it might even have to deploy “restrictive” policy to get surging prices under control, Governing Council member Pierre Wunsch said.

So positive interest-rates and a restrictive policy? Oh but as I am expecting a “severe shock” that rather fades like a shower on a sunny day.


It is not a coincidence that we suddenly have several ECB policymakers talking about higher interest-rates as there is clearly a plan to put that in our minds. It has worked for now in the foreign exchange market for now as the Euro has risen above 1.09 versus the US Dollar. But economic policy needs to be set for months and years not daily foreign exchange moves. I have explained the contradictions in what we have been told so let me now switch to another reason why I do not believe this is genuine.

Moment of truth coming for Italian BTP facing low growth, high inflation, ECB exit and political risks? Bond yields are exceeding the average cost of debt for the first time since the 2018 crisis. ( @fwred)

Just as Italy has a lot of debt to refinance.

Over the next 18 months, Italy is looking at refinancing EUR 400 bn of maturing bonds with – Much higher rates – A likely recession – Elections in Q2-23 Keep the Italian risk on your radar ( @MacroAlf )

I am not sure the ECB can stop QE as last time it tried it only lasted ten months and this time looks worse! We will have to see how 2022 plays out but inflation is high and the economy is heading south. We simply do not now yet how far south. We do know that policy easing can be done in a day as opposed to tightening which even in these open mouth operations is at best months away.