Where will Christine Lagarde lead the ECB?

We find ourselves in a new era for monetary policy in the Euro area and it comes in two forms. The first is the way that the pause in adding to expansionary monetary policy which lasted for all of ten months is now over. It has been replaced by an extra 20 billion Euros a month of QE bond purchases and tiering of interest-rates for the banking sector. The next is the way that technocrats have been replaced by politicians as we note that not only is the President Christine Lagarde the former Finance Minister of France the Vice-President Luis de Guindos is the former Economy Minister of Spain. So much for the much vaunted independence!

Monetary Policy

In addition to the new deposit rate of -0.5% Mario Draghi’s last policy move was this.

The Governing Council decided to restart net purchases under each constituent programme of the asset purchase programme (APP), i.e. the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP), at a monthly pace of €20 billion as from 1 November 2019.

It is the online equivalent of a bit of a mouthful and has had a by now familiar effect in financial markets. Regular readers will recall mt pointing out that the main impact comes before it happens and we have seen that again. If we use the German ten-year yield as our measure we saw it fall below -0.7% in August and September as hopes/expectations of QE rose but the reality of it now sees the yield at -0.3%. So bond markets have retreated after the pre-announcement hype.

As to reducing the deposit rate from -0.4% to -0.5% was hardly going to have much impact so let us move into the tiering which is a way of helping the banks as described by @fwred of Bank Pictet.

reduces the cost of negative rates from €8.7bn to €5.0bn (though it will increase in 2020) – creates €35bn in arbitrage opportunities for Italian banks – no signs of major disruption in repo, so far.

Oh and there will be another liquidity effort or TLTRO-III but that will be in December.

There is of course ebb and flow in financial markets but as we stand things have gone backwards except for the banks.

The Euro

If we switch to that we need to note first that the economics 101 theory that QE leads to currency depreciation has had at best a patchy credit crunch era. But over this phase we see that the Euro has weakened as its trade weighted index was 98.7 in mid-August compared to the 96.9 of yesterday. As ever the issue is complex because for example my home country the UK has seen a better phase for the UK Pound £ moving from 0.93 in early August to 0.86 now if we quote it the financial market way.

The Economy

The economic growth situation has been this.

Seasonally adjusted GDP rose by 0.2% in the euro area (EA19…….Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area in the third quarter of 2019 ( Eurostat)

As you can see annual economic growth has weakened and if we update to this morning we were told this by the Markit PMI business survey.

The IHS Markit Eurozone PMI® Composite
Output Index improved during October, but
remained close to the crucial 50.0 no-change mark.
The index recorded 50.6, up from 50.1 in
September and slightly better than the earlier flash
reading of 50.2, but still signalling a rate of growth
that was amongst the weakest seen in the past six and-a-half years.

As you can see there was a small improvement but that relies on you believing that the measure is accurate to 0.5 in reality. The Markit conclusion was this.

The euro area remained close to stagnation in
October, with falling order books suggesting that
risks are currently tilted towards contraction in the
fourth quarter. While the October PMI is consistent
with quarterly GDP rising by 0.1%, the forward looking data points to a possible decline in economic output in the fourth quarter.

As you can see this is not entirely hopeful because the possible 0.1% GDP growth looks set to disappear raising the risk of a contraction.

I doubt anyone will be surprised to see the sectoral breakdown.

There remained a divergence between the
manufacturing and service sectors during October.
Whereas manufacturing firms recorded a ninth
successive month of declining production, service
sector companies indicated further growth, albeit at
the second-weakest rate since January.

Retail Sales

According to Eurostat there was some good news here.

In September 2019 compared with August 2019, the seasonally adjusted volume of retail trade increased by 0.1% in the euro area (EA19). In September 2019 compared with September 2018, the calendar adjusted retail sales index increased by 3.1% in the euro area .

The geographical position is rather widespread from the 5.2% annual growth of Ireland to the -2.7% of Slovakia. This is an area which has been influenced by the better money supply growth figures of 2019. This has been an awkward area as they have often been a really good indicator but have been swamped this year by the trade and motor industry problems which are outside their orbit. Also the better picture may now be fading.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to 7.9% in September from 8.5% in August.

In theory it should rally due to the monthly QE but in reality it is far from that simple as M1 growth picked up after the last phase of QE stopped.

Comment

As you can see there are a lot of challenges on the horizon for the ECB just at the time its leadership is most ill-equipped to deal with them. A sign of that was this from President Lagarde back in September.

“The ECB is supporting the development of such a taxonomy,” Lagarde said. “Once it is agreed, in my view it will facilitate the incorporation of environmental considerations in central bank portfolios.” ( Politico EU)

Fans of climate change policies should be upset if they look at the success record of central banks and indeed Madame Lagarde. More prosaically the ECB would be like a bull in a China shop assuming it can define them in the first place.

More recently President Lagarde made what even for her was an extraordinary speech.

There are few who have done so much for Europe, over so long a period, as you, Wolfgang.

This was for the former German Finance Minister Wolfgang Schauble. Was it the ongoing German current account surplus she was cheering or the heading towards a fiscal one as well? Perhaps the punishment regime for Greece?

As to the banks there were some odd rumours circulating yesterday about Deutsche Bank. We know it has a long list of problems but as far as I can tell it was no more bankrupt yesterday than a month ago. Yet there was this.

Mind you perhaps this is why Germany seems to be warming towards a European banking union…..

What can we expect next from the economy of France?

During the Euro area slow down France has mostly been able to avoid the limelight. This is because it has at least managed some economic growth at a time when Germany not always has. It may not be stellar growth but at least there has been some.

In Q2 2019, GDP in volume terms grew at the same pace as in the previous quarter: +0.3% (revised by +0.1% from the first estimate).

However  there are questions going forwards which plugs into the general Euro area problem which got a further nudge on Monday.

The IHS Markit Eurozone Composite PMI® fell to
50.4 in September according to the ‘flash’ estimate,
down from 51.9 in August to signal the weakest
expansion of output across manufacturing and
services since June 2013………The survey data indicate that GDP looks set to rise by just 0.1% in the third quarter, with momentum weakening as the quarter closed.

As you can see growth is fading and may now have stopped if the PMI is any guide and this was reflected in the words of the Governor of the Bank of France in Paris yesterday.

For the past ten years, there is little doubt that ECB monetary policy under Mario Draghi’s Presidency has made a decisive contribution not only to safeguarding the euro in 2012, but also to the significant recovery of the euro area since 2013. Over this period, more than 10 million jobs have been created. Our unconventional measures are estimated to add almost 2 percentage points of growth and of inflation between 2016 and 2020.

It is revealing that no mention is made of growth right now as he concentrates on what he considers to be past glories. He has rounded the numbers up too as they are 1.5% and 1.9% respectively. Let me give him credit for one thing though which is this although I would like him to say this to the wider public as well.

Since I am talking to an audience of researchers I should of course emphasise that such numbers are subject to uncertainty.

Also raising inflation in the current environment of weak wage growth is likely to make people worse and not better off.

France

The situation here was better than the Euro area average but still slowed.

At 51.3 in September, the IHS Markit Flash France
Composite Output Index fell from 52.9 in August,
and pointed to the softest expansion in private sector
activity for four months.

Actually manufacturing is doing okay in grim times with readings of 49.7 and 50.3 suggesting flatlining. The real fear here was that the larger services sector is now being sucked lower by it.

However, with services firms registering their
slowest rise in activity since May, fears of negative
spill over effects from the manufacturing sector are
coming to fruition. Any intensification of such effects
would likely dampen economic growth going
forward.

This leaves me mulling the record of Markit in France as several years ago it was criticised for being too pessimistic by the French government and more recently seems to have swung the other way.

What about fiscal policy?

This did get a mention in the speech by the Governor of the Bank of France yesterday.

Failing that, a second answer is for fiscal policy to step in. Fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long-term growth.

The problem with that argument is that even the French run IMF could not avoid pointing out this in July.

France’s public debt has been consistently rising over the last four decades, increasing by 80 percent of GDP since the 1980s to reach close to 100 percent of GDP at end-2018. This reflects the inability of successive governments to take full advantage of good times to reverse the spending increases undertaken during downturns.

Actually some of the IMF suggestions look rather chilling and perhaps in Orwellian language.

rationalizing spending on medical products and hospital services; improving the allocation of resources in education

Also and somewhat typically the IMF has missed one change in the situation which is that at present France is being paid to borrow. It’s ten-year yield went negative at the beginning of July and has mostly been there since. As I type this it is -0.32%. It still has to pay a little for longer terms ( the thirty-year is 0.48%) but as you can see not much.

So the situation is that France does have quite a lot of relatively expensive debt from the past but could borrow now very cheaply if it chose to do so.

Banks

Whilst he s referring to macroprudential policy it is hard not to have a wry smile at this from the Governor of the Bank of France.

 To start with, as of today, our toolkit is very much bank-centric.

Especially when he add this.

We are making some progress to extend macroprudential policy beyond the banking sector.

Returning to the banks they are just like elsewhere.

PARIS (Reuters) – Societe Generale (SOGN.PA) plans to cut 530 jobs in France by 2023, CGT union said in a statement.

Of course BNP Paribas has been taking some brokerage business and employees from Deutsche Bank although it has not be a complete success according to financemagnate.com.

Deutsche’s clients will receive letters explaining how the transfer will work. However, some of them have already moved to competitors such as Barclays, which has won roughly $20 billion in prime brokerage balances.

In a way the French banks have used Deutsche Bank as a shield. But many of the same questions are in existence here. How are they going to make sustained profits in a world of not much economic growth and negative interest-rates?

Unemployment

This is the real achilles heel of the French economy. From Insee

The ILO unemployment rate decreased by 0.2 points on average in Q2 2019, after a 0.1 points fall in the first quarter. It stood at 8.5% of the labour force in France (excluding Mayotte), 0.6 points below its Q2 2018 level and its lowest level since early 2009.

Whilst the falls are welcome it is the level of unemployment and the fact it is only now approaching the pre credit crunch levels which are the issue as well as this.

Over the quarter, the employment rate among the youth diminished (−0.3 points),

Whilst the unemployment rate for youth fell by 0.6% to 18.6% it is still high and the falling employment rate is not the best portent for the future.

Comment

So far the economy of France has managed to bumble on and unlike the UK and Germany avoided any quarterly contractions in economic output. If you look at this morning’s official survey then apparently the only way is up baby.

In September 2019, households’ confidence in the economic situation has increased for the ninth consecutive month. At 104, the synthetic index remains above its long-term average (100), reaching its highest level since January 2018.

Perhaps the fall in unemployment has helped and a small rise in real wages. The latter are hard to interpret as a change at the opening of the year distorted the numbers.

firms might pay a special bonus for purchasing power (PEPA) in the first quarter of 2019, to employees earning less than 3 times the minimal wage.

According to the official survey published yesterday businesses are becoming more optimistic too.

In September 2019, the business climate has gained one point, compared to August. The composite indicator, compiled from the answers of business managers in the main sectors, stands at 106, above its long-term mean (100)

So there you have it everything except for the official surveys points downwards. In their defence the official surveys have been around for a long time. So let me leave you with some trolling by the Bank of France monthly review.

French economic growth has settled into a fairly stable pace since mid-2018 of between 1.2% and 1.4% year-on-year . France has thus demonstrated greater resilience than other euro area economies, particularly Germany, where year-on-year growth only amounted to 0.4% in mid-2019. This growth rate should continue over the coming quarters: based on Banque de France business surveys published on 9 September, we expect quarter-on-quarter GDP growth in the third quarter of 2019 of 0.3%.

Rethinking The Dollar

I did an interview for this website. Apologies if you have any issues with the sound as the technology failed us a little and we had to switch from my laptop to my tablet.

 

 

 

 

Germany has become a weak link for the Euro area economy

This morning has focused our minds again on what has been one of the economic developments of the past eighteen months or so. This is the turn in the trajectory of the German economy which has gone from being what the Shangri-Las would call the leader of the pack to not only a laggard but maybe contracting. So let us get straight to the news,

The German economy contracted in September,
latest flash PMI data showed, as the downturn in
manufacturing deepened and service sector growth
lost momentum. Job creation meanwhile stalled as
firms reported weakening demand and pessimism
towards the outlook for activity. ( Markit PMI )

Manufacturing

If we start with this area then we have to address the fact that things were already really bad so that gives a perspective on the state of play. If we thought the worst was behind us then how about this?

September’s IHS Markit Flash Germany
Manufacturing PMI read 41.4, signalling the
sharpest decline in business conditions across the
goods-producing sector since the depths of the
global financial crisis in mid-2009. ( Markit)

The only time I can recall a series weaker than this was the Greek manufacturing sector which I recall going into the mid-30s back in the day as the economy collapsed, or if you prefer was rescued. I am sure that some there are having a grim smile at this turn of events although of course it will have side-effects for my subject of Friday.

The survey also tries to look ahead but that raises little hope and even adds to the gloom.

The survey showed a sustained decline in underlying
demand, with total inflows of new business falling
for the third month running and at the quickest rate
for seven years. Slumping manufacturing orders led
the decline, recording the steepest drop in more than
a decade in September,

If we switch to the official data we were told this earlier this month.

In July 2019, production in industry was down by 0.6% on the previous month on a price, seasonally and calendar adjusted basis according to provisional data of the Federal Statistical Office (Destatis). In June 2019, the corrected figure shows an decrease of 1.1% (primary -1.5%) from May 2019.

As you can see there June was not as bad as thought only for the number to fall again in July meaning we can get some perspective from this.

-4.2% on the same month a year earlier (price and calendar adjusted)

This means that the index for industrial production is at 101.2 where 2015 = 100 which shows little growth and if we drop construction out of the numbers it falls to 99.5. So in broad terms what Talking Heads would call a road to nowhere. More specifically the seasonally and calendar adjusted figures peaked at 107.2 in May of 2018.

Also we see that the PMI numbers we looked at above are pretty consistent with the official orders data.

Based on provisional data, the Federal Statistical Office (Destatis) reports that price-adjusted new orders in manufacturing had decreased in July 2019 a seasonally and calendar adjusted 2.7% on the previous month…….

-5.6% on the same month a year earlier (price and calendar adjusted).

Services

This has been doing much better than the manufacturing sector. But we already know from the numbers above that it has not pulled the manufacturing sector higher so the troubling question is whether it pulled the service sector down?

Growth of business activity in the service sector
slowed sharply since August to one of the weakest
rates seen over the past three years……..Flash Germany Services PMI Activity Index at
52.5 (Aug: 54.8). 9-month low.

Sadly the answer is yes.

though notably there was also a drop in service sector new business – the first recorded since December 2014.

You may not be surprised to learn that much of the trouble is coming from abroad.

Lower demand from abroad also remained a key factor, with both manufacturers and service providers reporting notable decreases in new export orders during the month.

Bringing everything together brought a new development for the Markit PMI series.

“Another month, another set of gloomy PMI figures
for Germany, this time showing the headline
Composite Output Index at its lowest since October
2012 and firmly in contraction territory.
“The economy is limping towards the final quarter of
the year and, on its current trajectory, might not see
any growth before the end of 2019″

That is significant for them as they have been over optimistic for Germany throughout this phase. They have recorded growth when the official data has showed a contraction. Also if we look back to the opening of last year they gave us numbers in the high 50s showing very strong growth whereas as I pointed out on the 20th of last month the reality was this.

Actually back then we did not know how bad things were because the GDP numbers were wrong as the Bundesbank announced yesterday…….In the first quarter, growth consequently totalled 0.1% (down from 0.4%), while it amounted to 0.4% in the second quarter (after 0.5%).

In some ways it is harsh to point this out because the official data series was wrong too but the PMIs were also more optimistic than what we thought the numbers were then, and sadly were overall simply misleading.

Bonds

There has been an impact here this morning as Germany’s bond market has resumed its rally. The picture had been weaker for a while in an example of buy the rumour and sell the fact on ECB ( European Central Bank ) action. But today the ten-year yield has fallen to -0.58% and the whole curve has gone negative again with the thirty-year at -0.12%.So Germany is being paid to borrow at every maturity.

Comment

There are more than a few questions here and the Ivory Tower of the ECB has been instructed to look into the situation. From a Working Paper released this morning.

In the period from January 2018 to June 2019 the year-on-year growth rate of euro area industrial production (excluding construction) fell by 6.3 percentage points overall, from 3.9% to -2.4%. This is by far the largest fall recorded among major economies in that period……Among the largest euro area countries, the biggest declines were recorded by Germany (10.9 percentage points), the Netherlands (5.7 percentage points) and Italy (5.5 percentage points).

In a broad sweep what has been a long-running success for the Euro area which has been German production leading to the trade surplus has stalled and hit the brakes. Or as Markit put it.

The automotive sector was once again highlighted as a particular source of weakness.

As to the ECB it is looking rather impotent here. It has made its move with even lower interest-rates ( -0.5%) and more bond buying or QE but it was doing that when the German economy turned down at the opening of 2018. Also the hype about the new TLTRO and the issue of tiering for The Precious collapsed as the take-up was a mere 3.4 billion Euros.

Of course Germany could respond with fiscal policy. Here the outlook is bright as it has and is running a fiscal surplus and it would be paid to borrow. Yet it shows little or no sign of doing so. From time to time a kite is flown like the current one about more spending on renewable energy but then the wind stops blowing and the kite falls to the ground.

Meanwhile this morning’s monthly report from the Bundesbank seems rather extraordinary.

Moreover, from today’s vantage point, only a slight decline in GDP is to be expected overall, even including the second quarter. “Such a decline should currently be seen as part of a cyclical return to normality as the German economy emerges from a period of overheating,” according to the experts.

Podcast

 

 

 

 

 

 

What is the UK economic situation and outlook?

The UK is an example of so much going on in some areas albeit with so far no result but apparently not much in others. The latter category includes the real economy if the latest set of Markit PMI business surveys are any guide.

UK service providers indicated that business activity growth lost momentum during August and remained subdued in comparison to the trends seen over much of the past decade. The latest survey also revealed slower increases in new work and staffing levels, which was often linked to sluggish underlying economic conditions.

The slowing of the services sector added to contracting manufacturing and construction sectors to give us this overall result.

At 49.7 in August, the seasonally adjusted All Sector Output
Index dropped from 50.3 in July and registered below the
50.0 no-change mark for the second time in the past three
months……….t, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.

There are two elements of context here. The first is that this survey is not accurate enough to tell to 0.1% or to say 49.7 is any different to unchanged. Also we now that as a sentiment index it had a bit of a shocker during the last period of political turmoil in late summer 2016. Thus our conclusion is that the economy is weak and struggling but contracting? We do not yet know.

Car Registrations

There was some interesting news here summarised by Samuel Tombs of Pantheon.

Good news – car registrations were strong in August. The 1.7% y/y drop is consistent with a big seasonally-adjusted m/m% rise, as sales in Aug 2018 jumped ahead of new emissions testing rules. This points to car sales boosting q/q% GDP growth by a non-trivial 0.05pp in Q3.

So whilst the numbers were down on last year they were a solid improvement on July.

A Fiscal Boost

In perhaps the least surprising development this year the Chancellor Sajid Javid announced this yesterday.

The Chancellor has announced an increase in spending on public services for next year. Day-to-day spending on public services will grow by 4.1%, or around £13.8 billion, between 2019−20 and 2020−21 in real terms. This represents of a top-up of £11.7 billion to the provisional spending plans Mr Javid inherited from his predecessor, alongside a £1.7 billion top up to existing capital spending plans for 2020−21, meaning that total spending will be £13.4 billion higher next year than was planned in the spring. ( IFS )

If we switch to GDP as our measure then the planned increases were of the order of 0.6%. As we borrowed 1.1% of GDP in the fiscal year to March that points at 1.7% although as we were already spending more maybe more towards 2% of GDP. That is a little awkward for the Institute of Fiscal Studies which told us over the weekend the fiscal rules would be broken. Mind you as nobody else cares about them it is not that big a deal. Also the IFS seems quite keen on fantasies.

Making major spending decisions without the latest economic and fiscal forecasts is a risky move for the Chancellor. On the basis of forecasts from the spring, extra borrowing to fund today’s announcements could – just – be accommodated within the government’s fiscal targets. But the next set of forecasts from the OBR, due later this year, are likely to reflect a deterioration in the near-term outlook for the UK economy and public finances.

Just as a reminder the first rule of OBR club is that the OBR is always wrong. How has the IFS not spotted this? Mind you their head Paul Johnson was enthusiastically plugging the RPI news yesterday hoping that his 2015 Inflation Review might get pulled out the recycling bin and that it might have 17% of it made up of fantasy rents.

After all that I am not sure we can trust their view on austerity but for what it;s worth here it is.

This is enough to reverse around two thirds of the real cuts to day-to-day spending on public services – at least on average – since 2010, and around one third of the cuts to per capita spending.

Bank of England

Governor Carney was giving evidence to Parliament yesterday and it included this.

The negative impact of a no-deal Brexit will not be as severe as originally thought because of improved planning by the government, businesses and the financial sector, the Bank of England has said.

Governor Mark Carney told the Treasury select committee that the Bank now believes GDP will fall by 5.5% in the worst-case scenario following a no-deal Brexit – less than the 8% contraction it predicted in last November.

The Bank’s revised assessment of the possible scenarios also says unemployment could increase by 7% and inflation may peak at 5.25% if the UK leaves the European Union without a deal. ( Sky News )

Who could possibly have though that people and businesses would plan ahead? Of course when your own Forward Guidance has been so woeful maybe you have something of a block on that sort of thing. Also if I was Governor Carney I would have avoided all mention of a 7% Unemployment Rate after the 2013 Forward Guidance debacle on that subject.

Perhaps this is why some want to delay Brexit because in 2/3 years time at the current rate of progress the Bank of England will be forecasting growth from a No-Deal.

Also although he does not put it like that in the quote below is a confession that I am right about how falls in the Pound £ impact inflation.

It is likely that food bills will rise in the event of a no-deal Brexit, that is almost exclusively because of the exchange rate impact. Movements are quickly translated onto the shop shelf, and domestic prices, imperfect substitutes, also increase. That impact has lessened because of the new tariff regime the government has put in place.

Another goal I have slipped past their legion of Ivory Tower economists.

There was something else that was really odd from him via Bloomberg.

Mark Carney says there’s almost no chance of the Bank of England intervening in the foreign-exchange market to control swings in the pound

So why has the UK been building up its foreign exchange reserves then? They are now £66.8 billion.

Comment

The UK economy has been remarkably resilient in 2019 so far. We have had all sorts of Brexit and non-Brexit plans, the trade war and much else. Somehow we have got by. Financial markets are in flux as no sooner had the Financial Times started to cheer the way the UK Pound £ fell below US $1.20 it reversed and is now above US $1.23.

The FT has a problem because 1% moves lower in the UK Pound £ are a plunge and yet the 9% fall in the 2068 Index-Linked Gilt yesterday was described like this by economics editor Chris Giles.

Price of the 2068 index-linked gilt dropped today, but complete stability in market and prices still higher than a month ago – – showing those who claimed changing the RPI would kill the market to have exagerated wildly

I will ignore the second straw(wo)man bit and simply point out it has now fallen 13%. The losers will not be the “Gnomes of Zurich” as Chris claimed at the Royal Statistical Society but the ordinary pensioner looking for safety. It gives us a new definition for “complete stability” in my financial lexicon for these times.

The Investing Channel

Will this be the final easing countdown for Europe and the ECB?

We find ourselves in the economic equivalent of the Phoney War period of the Second World War as we wait for tomorrow’s policy announcement from the European Central Bank. But it is also a period where events are moving quite quickly. Here is the IMF from yesterday.

In our July update of the World Economic Outlook we are revising downward our projection for global growth to 3.2 percent in 2019 and 3.5 percent in 2020. While this is a modest revision of 0.1 percentage points for both years relative to our projections in April, it comes on top of previous significant downward revisions.

It is not the numbers that bother me as the IMF is far from the best forecaster but the direction of travel where it has found itself revising the outlook downwards. Also there was a curious additional part to this IMF output as the quite below shows.

Financial conditions in the United States and the euro area have further eased, as the US Federal Reserve and the European Central Bank adopted a more accommodative monetary policy stance.

I think they mean are expected to do so. Ironically this came with rumours that the ECB will not act tomorrow and will instead guide us to what it will do in September.

Business Surveys

After this mornings Purchasing Managers Indices the ECB view will be more like definitely maybe on a delay. It was only yesterday that I was pointing out that France had been doing better than its peers.

Modest growth was driven by the service sector,
which posted an expansion in business activity for
the fourth month in a row. However, the rate of
increase decelerated from June and was moderate
overall. Meanwhile, manufacturing output slipped
back into contraction territory, following a first rise for
four months in June. That said, the decline was only
marginal.

So according to this survey the rate of growth is slowing in France and you will not be surprised to see what is the driving force of this.

New export business was broadly stagnant at the
start of the third quarter, with a contraction in
international sales at manufacturers broadly
offsetting a modest rise at services firms.

A few minutes later the news from Germany was also downbeat.

The health of German manufacturing went from
bad to worse in July, according to the flash PMI
data, raising the risk of the euro area’s largest
member state entering a mild technical recession.
“The performance from Germany’s goods
producers in July is the worst recorded by the
survey in seven years, with the renewed weakness
mainly stemming from an accelerated drop in
export orders – the most marked seen in over a
decade.

We have got used to weak readings for this sector in 2019 but the 43.1 for July so far was the weakest we have seen. The services sector is doing better but even it is now slowing.

Still solid growth in the service sector means that
the German economy is just about keeping its head
above water for now, but even here there are signs
of increased worries among companies as
optimism hit a three-and-a-half year low

If we sweep all that up and look at the total Euro area we were told this.

The eurozone economy relapsed in July, with the
PMI giving up the gains seen in May and June to
signal one of the weakest expansions seen over the
past six years. The pace of GDP growth looks set
to weaken from the 0.2% rate indicated for the
second quarter closer to 0.1% in the third quarter.

That will get the attention of the ECB. We know that these PMI surveys are far from always correct but central bankers like them and the ECB will be very concerned about the Euro economy continuing to slow. It will not agree with it all as we know the German Bundesbank thinks that the German economy contracted in the second quarter whereas Markit is more positive. But that means it starts from a weaker position.

Money Supply

The opening salvo here did buck the bad news trend.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, stood at 7.2% in June, unchanged from previous month.

That is better than the 6.2% with which 2019 opened and gave us another hint that it was going to be a rough first half to 2019 for the Euro area. The situation has improved in monetary terms but that has collided with the trade war.

However the wider measure was not good.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.5% in June 2019 from 4.8% in May, averaging 4.7% in the three months up to June.

If we break it down we see this.

Looking at the components contributions to the annual growth rate of M3, the narrower aggregate M1 contributed 4.8 percentage points (as in the previous month),

So the slowing was in the bread money components represented by M2 and M3. Also if we look at the other components some of this is coming externally.

net external assets contributed 2.4 percentage points (as in the previous month)

I am always cautious about over analysing the components as I have seen that go very wrong in the past but it would be preferable if the growth was domestic. Especially as the ECB bank survey released yesterday suggested that credit was becoming harder to find.

According to the July 2019 bank lending survey, credit standards tightened in the second quarter of 2019 for loans to enterprises, marking the end of the net easing
period started in 2014, as concerns about the economic outlook and increased risk aversion translated into tighter internal guidelines and loan approval criteria despite
favourable funding conditions. Credit standards also tightened for consumer credit, in line with developments in the previous quarter…..

 

Comment

The situation here comes out of the deepest fears of the ECB. What I mean by that is that we have not yet had 7 full months from when the last easing programme ended. Firstly that poses deep question such as what good did it do and why can’t the Euro area grow without stimulus? But in terms of the ECB meeting and policy they are likely to be ignored. Instead it will focus on factors such as its own claim ( Mario Draghi) that the QE programme and a -0.4% deposit rate contributed 1.5% of GDP growth to the Euro area.

Also any proper credit flow relies on the banks and they continue to look thoroughly zombified. From CNBC.

German lender Deutsche Bank reported a weaker-than-expected net loss of 3.15 billion euros ($3.51 billion) for the second quarter of 2019.

Analysts polled by research firm Refinitiv had estimated a net loss of 1.7 billion euros for the period, due to the bank’s massive restructuring program announced earlier this month. The German bank itself had previously said it expected to report a net loss of 2.8 billion euros for the quarter.

The share price has fallen 4% this morning and back below 7 Euros in response to the news that things are even worse than we were told earlier this month. Next via Reuters there was this.

Italy’s biggest bank by assets UniCredit (CRDI.MI) is considering cutting around 10,000 jobs, or 10% of its global workforce, as part of a new business plan to be unveiled in December, two sources close to the matter said on Monday.

It is not my purpose today to look at those two banks individually but more to use them of examples of a banking system that is troubled if not broken. If we switch to Spain which has been the best performing of the main Euro area economies in the Euro boom I note that many of its banks have share prices hitting new lows.

Thus after all tomorrow for the ECB may yet sing along to this from Europe.

The final countdown
It’s the final countdown
The final countdown
The final countdown (final countdown)
Ohhh. It’s the final countdown

 

 

Some much needed better economic news for France

Today has brought some good news for the economy of France and let us start with a benefit for the future. From Reuters.

Airbus signed a deal on Monday to sell 300 aircraft to China Aviation Supplies Holding Company, including 290 A320 planes and 10 A350, the French presidency said in a statement.

So we learn that someone can benefit from a trade war as we also see Boeing’s current problem with the 737 max 8 no doubt also at play here. Airbus is a European consortium but is a major factor in the French economy and below is its description of its operations in France.

Overall, Airbus exports more than €26 billion of aeronautical and space products from France each year, while placing some €12.5 billion of orders with more than 10,000 French industrial partners annually.

Business surveys

The official measure released earlier told us this.

In March 2019, the business climate is slightly more favorable than in February. The composite indicator, compiled from the answers of business managers in the main sectors, has gained one point: it stands at 104, above its long-term mean (100).

If we look at the recent pattern we see a fall from 105 in November to 102 in December where it remained in January before rising to 103 in February and now 104 in March. So according to it growth is picking up. It has a long track record but is far from perfect as for example the recent peak was 112 in December 2017 but we then saw GDP growth of only 0.2% in the first quarter of 2018 as it recorded 110.

Continuing with its message today we are also told this about employment.

In March 2019, the employment climate has improved again a little, after a more marked increase in February: the associated composite indicator has gained one point and stands at 108, well above its long-term average.

This is being driven by the service sector.

Also things should be improving as we look ahead.

The turning point indicator for the French economy as a whole remains in the area indicating a favourable short-term economic outlook.

Although the reading has fallen from 0.7 in January to 0.5 in March.

Economic Growth

We have been updated on this too with a nudge higher.It did not come with the fourth quarter number for Gross Domestic Product ( GDP) growth which was still 0.3% but the year to it was revised up to 1% from 0.9% and the average for 2018 is now 1.6% rather than 1.5%.

National Debt

The economic growth has helped with the relative number for the national debt.

At the end of 2018, the Maastricht debt accounted for €2,315.3 bn, a €56.6 bn year-on-year growth after a €70.2 bn increase in 2017. Maastricht debt is the gross consolidated debt of the general government, measured at nominal value. It reached 98.4% of GDP at the end of 2018 as in 2017.

As you can see the debt has risen but the economic growth has kept the ratio the same. At the moment investors are sanguine about such debt levels with the ten-year yield a mere 0.37% and it has been falling since mid October last year when it was just above 0.9%. Partly that is to do with the ECB buying and now holding onto some 422 billion Euros of it plus mounting speculation it may find itself buying again.

Those who followed the way the European Commission dealt with Italy may have a wry smile at this.

In 2018, public deficit reached −€59.6 bn, accounting for −2.5% of GDP after −2,8% of GDP in 2017

With economic growth slowing and President Macron offering a fiscal bone or two to the Gilet Jaunes then 2019 looks like it will see a rise. As to the overall situation then France has a public sector which fits the description, hey big spender.

As a share of GDP, revenues decreased from 53.6% to 53.5%. Expenditure went down from 56.4% to 56.0%.

For comparison the UK national debt under the same criteria is 84% of GDP although our bond yield is higher with benchmark being 1%.

Prospects

The Bank of France released its latest forecasts earlier this month and if we stay in the fiscal space makes a similar point to mine.

After a period of quasi-stability in 2018 at 2.6% of GDP, the government deficit is expected to climb temporarily above 3% of GDP in 2019, given the one-off effect related to the transformation of the Tax Credit for Competitiveness and Employment (CICE).

So the national debt will be under pressure this year and depending on economic growth the ratio could rise to above 100%. As to economic growth here is the detail.

French GDP should grow by around 1.4-1.5% per year between 2019 and 2021. This growth rate, which has been slightly revised since our December 2018 projections, should lead to a gradual fall in unemployment to 8% in 2021.

So the omission of the word up means the revision was downwards and if they are right then we also get a perspective on the QE era as GDP growth will have gone 2.3%,1.6% and then 1.4/1.5%. So looked at like that it was associated with a rise in GDP of 1%. Also we see the Bank of France settling on what is something of a central banking standard of 1.5% per annum being the “speed limit” for economic growth.

Right now they think this.

Based on the Banque de France’s business survey published on 11 March, we estimate GDP growth of 0.3% for the first quarter of 2019.

Which apparently allows them to do a little trolling of Germany.

The deceleration in world demand is expected to weigh on activity, even though France is slightly less exposed than some of its larger euro area partners, until mid-2019.

It only has one larger Euro area partner.

Also we get a perspective in that after a relatively good growth phase should the projections have an aim that is true unemployment will be double what it is in the UK already.

Added to this we have central banks who claim to have a green agenda but somehow also believe that growth can keep coming and is to some extent automatic.

Growth should then be sustained by an international environment that is becoming generally favourable once again and export market shares that are expected to stabilise.

Oh and these days central banks are what Arthur Daley of Minder would call a nice little earner.

Like each year, the bulk of the Banque de France’s profits were paid to the government and hence to the national community in the form of income tax and dividends, with EUR 5 billion due for 2017.

Comment

There is a fair bit to consider here. Firstly we have the issue of the private-sector or Markit PMI survey being not far off the polar opposite of the official one.

At the end of the first quarter, the French private
sector was unable to continue the recovery seen in
February, as both the manufacturing and service
sectors registered contractions in business activity.

If they surveyed a similar group that is quite a triumph! The French economy can “Go Your Own Way” as for example we saw it grow at a quarterly rate of 0.2% in the first half of 2018 and then 0.3% in the second. Only a minor difference but the opposite pattern to elsewhere.

Looking at the monetary data it does seem to be doing better than the overall Euro area. There was a sharp fall in M1 growth  between November and December which poses a worry for now but then a recovery of much of it to 9.2% in January. So if this is sustained France looks like it might outperform the Euro area as 2018 progresses as it overall saw a fall in money supply growth. Or if the numbers turn out to work literally then a dip followed by a pick-up.

 

How long before the ECB and Federal Reserve ease monetary policy again?

Yesterday brought something of a change to the financial landscape and it is something that we both expected and to some extent feared. Let me illustrate by combining some tweets from Lisa Abramowicz of Bloomberg.

Biggest one-day drop in 10-year yields in almost a year…..Futures traders are now pricing in a 47% chance of a rate cut by January 2020, up from a 36% chance ahead of today’s 2pm Fed release……….More steepening on the long end of the U.S. yield curve as investors price in more inflation in decades to come, thanks to a dovish Fed. The gap between 30-year & 10-year U.S. yields is now the widest since late 2017.

I will come to the cause of this in a moment but if we stick with the event we see that the ten-year US Treasury Note now yields 2.5%. The Trump tax cuts were supposed to drive this higher as we note that it was 3.24% in early November last year. So this has turned into something of a debacle for the “bond vigilantes” who are supposed to drive bond markets lower and yields higher in fiscal expansions. They have been neutered yet again and it has happened like this if I had you over to the US Federal Reserve and its new apochryphal Chair one Donald Trump.

US Federal Reserve

First we got this on Wednesday night.

The Federal Reserve decided Wednesday to hold interest rates steady and indicated that no more hikes will be coming this year. ( CNBC)

No-one here would have been surprised by the puff of smoke that eliminated two interest-rate increases. Nor by the next bit.

The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019. The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account (SOMA) at the end of September 2019. ( Federal Reserve).

So as you can see what has become called Qualitative Tightening is on its way to fulfilling this description from Taylor Swift.

But we are never ever, ever, ever getting back together
Like, ever

More specifically it is being tapered in May and ended in September as we mull how soon we might see a return of what will no doubt be called QE4.

If we switch to the economic impact of this then the first is that it makes issuing debt cheaper for the US economy as the prices will be higher and yields lower. As President Trump is a fiscal expansionist that suits him. Also companies will be able to borrow more cheaply and mortgage rates will fall especially the fixed-rate ones. Here is Reuters illustrating my point.

Thirty-year mortgage rates averaged 4.28 percent in the week ended March 21, the lowest since 4.22 percent in the week of Feb. 1, 2018. This was below the 4.31 percent a week earlier, the mortgage finance agency said.

The average interest rate on 15-year mortgages fell 0.05 percentage point to 3.71 percent, the lowest since the Feb. 1, 2018 week.

Next week should be lower still.

Euro area

This morning has brought news which has caused a bit of a shock although not to regular readers here who recall this from the 27th of February.

The narrow money supply measure proved to be an accurate indicator for the Euro area economy in 2018 as the fall in its growth rate was followed by a fall in economic (GDP) growth. It gives us a guide to the next six months and the 0.4% fall in the annual rate of growth to 6.2% looks ominous.

The money supply numbers have worked really well as a leading indicator and better still are mostly ignored. Perhaps that is why so many were expecting a rebound this morning and instead saw this. From the Markit PMI business survey.

“The downturn in Germany’s manufacturing sector
has become more entrenched, with March’s flash
data showing accelerated declines in output, new
orders and exports……….the performance of the
manufacturing sector, which is now registering the
steepest rate of contraction since 2012.

The reading of 44.7 indicates a severe contraction in March and meant that overall we were told this.

Flash Germany PMI Composite Output Index at 51.5 (52.8 in Feb). 69-month low.

There is a problem with their numbers as we know the German economy shrank in the third quarter of last year and barely grew in the fourth, meaning that there should have been PMI readings below 50, but we do have a clear direction of travel.

If we combine this with a 48.7 Composite PMI from France then you get this.

The IHS Markit Eurozone Composite PMI® fell from
51.9 in February to 51.3 in March, according to the
preliminary ‘flash’ estimate. The March reading was
the third-lowest since November 2014, running only
marginally above the recent lows seen in December
and January.

Or if you prefer it expressed in terms of expected GDP growth.

The survey indicates that GDP likely rose by a modest 0.2% in the opening quarter, with a decline in manufacturing
output in the region of 0.5% being offset by an
expansion of service sector output of approximately
0.3%.

So they have finally caught up with what we have been expecting for a while now. Some care is needed here as the PMI surveys had a good start to the credit crunch era but more recent times have shown problems. The misfire in the UK in July 2016 and the Irish pharmaceutical cliff for example. However, central bankers do not think that and have much more faith in them so we can expect this morning’s release to have rather detonated at the Frankfurt tower of the ECB. It seems financial markets are already rushing to front-run their expected response from @fastFT.

German 10-year bond yield slips below zero for first time since 2016.

In itself a nudge below 0% is no different to any other other basis point drop mathematically but it is symbolic as the rise into positive territory was accompanied by the Euro area economic recovery. Indeed the bond market has rallied since that yield was 0.6% last May meaning that it has been much more on the case than mainstream economists which also warms the cockles of one former bond market trader.

More conceptually we are left wonder is the return to something last seen in October 2016 was sung about by Muse.

And the superstars sucked into the super massive
Super massive black hole
Super massive black hole
Super massive black hole

If we now switch to ECB policy it is fairly plain that the announcement of more liquidity for the banks ( LTTRO) will be followed by other easing. But what? The problem with lowering interest-rates is that the Deposit-Rate is already at -0.4%. Some central bankers think that moving different interest-rates by 0.1% or 0.2% would help which conveniently ignores the reality that vastly larger ones overall ( 4%-5%) have not worked.

So that leaves more bond buying or QE and beyond that perhaps purchases of equities and commercial property like in Japan.

Comment

I have been wondering for a while when we would see the return of monetary easing as a flow and this week is starting to look a candidate for the nexus point. It poses all sorts of questions especially for the many countries ( Denmark, Euro area, Japan, Sweden. and Switzerland) which arrive here with interest-rates already negative. It also leaves Mark Carney and the Bank of England in danger of another hand brake turn like in August 2016.

The Committee continues to judge that, were the economy to develop broadly in line with those projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

Although of course it could be worse as the Norges Bank of Norway may have had a false start.

Norges Bank’s Executive Board has decided to raise the policy rate by 0.25 percentage point to 1.0 percent:

But the real problem is that posed by Talking Heads because after the slashing of interest-rates and all the QE well let me hand you over to David Byrne.

And you may ask yourself, well
How did I get here?