This has been an extraordinary week, so much so that I am going to relegate the shambles that was the ECB action yesterday as President Lagarde lived down to all my criticisms of her to second place. This is because at around 5pm London time yesterday the US Cavalry arrived so let me hand you over to the New York Federal Reserve,
As a part of its $60 billion reserve management purchases for the monthly period beginning March 13, 2020 and continuing through April 13, 2020, the Desk will conduct purchases across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. Specifically, the Desk plans to distribute reserve management purchases across eleven sectors, including nominal coupons, bills, Treasury Inflation-Protected Securities, and Floating Rate Notes
So most of the “not QE” is now outright QE ar least for now and we know what tends to happen to such temporary moves. After all weren’t the daily Repos supposed to be temporary when they started last September?
Also in another very familiar theme we see that any attempt at a “taper” seems to morph into an expansion.
Today, March 12, 2020, the Desk will offer $500 billion in a three-month repo operation at 1:30 pm ET that will settle on March 13, 2020. Tomorrow, the Desk will further offer $500 billion in a three-month repo operation and $500 billion in a one-month repo operation for same day settlement. Three-month and one-month repo operations for $500 billion will be offered on a weekly basis for the remainder of the monthly schedule.
There is a lot of numbers bingo there and many on social media either fell for it or chose to fall for it by declaring an extra US $1.5 trillion of QE. But let us take the advice of Kylie Minogue.
I’m breaking it down
I’m not the same
We had to wait less than an hour to discover that the first Repo was for US $78.4 billion. So we saw that the Fed has in fact finally taken my advice and made sure it was offering too much to find out as much as possible what the true state of play is. Rather late in the day though as it is doing it in an equity market inspired panic as opposed ti thinking ahead. As to QE we have something of a US $78.4 as an 84 day Repo qualifies for me in spite of officially being “not QE” plus we have an Operation Twist style extension of average maturity on the existing US $60 billion a month.
I do not know what today’s Repo allocations will be only that bids will be filled in full up to the US $500 billion maximum. Should they be like last night’s then we will see a US $225 billion increase in QE which is quite some distance from many claims. Of course more or less might be taken.
What is really happening here?
There is an elephant in the room and it was sung about by Aloe Blacc
I need a dollar dollar, a dollar is what I need
Well I need a dollar dollar, a dollar is what I need
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me
Indeed he was especially prescient here.
Bad times are comin’ and I reap what I don’t sow
Well let me tell you somethin’ all that glitters ain’t gold
Actually at US $1583 gold is not glittering much either with rumours abounding that it is being sold to help settle margin payments elsewhere. In a crisis people want the security of King Dollar or the world’s reserve currency. This adds to the existing dollar shortage which I wrote about on the 25th of September 2018, and to the issue last September when a Euro area bank had to go to the US Federal Reserve for dollars.
This brings us to the banks who are the drivers of this. The suspicion is that at a minimum some cannot get dollars in the usual way via markets and thus have to go to the US Federal Reserve. With markets being as they have ( oil, bonds and equities) frankly I would not be surprised if some banks are in trouble. On that note I see one at least has made an official denial of such problems already today.
FRANKFURT (Reuters) – Deutsche Bank’s <DBKGn.DE> top executives sought to assure employees and investors over its ability to weather the coronavirus as shares in the German lender hit a new low on Thursday amid a wider stock market sell-off.
Christian Sewing, chief executive of Germany’s largest bank, told employees in a memo seen by Reuters that Deutsche Bank’s business was in “good shape as the positive momentum of the fourth quarter has continued”.
A Communications Break Down at the ECB
There was some surprise at the lack of much action from the ECB yesterday highlighted by the fact that even more bank subsidies were accompanied by further falls in bank share prices. But it got worse and then much worse. The worse bit was when the ECB press officer had to correct President Lagarde about the size of the extra QE announced as it was 120 billion Euros and not 100 billion. So the claim that Christine Lagarde was good at reading off a teleprompter crashed and burned, But then things got even worse.
Well, we will be there, as I said earlier on, using full flexibility, but we are not here to close spreads. This is not the function or the mission of the ECB.
Curious because you could summarise the term of her “Whatever it takes” predecessor as doing exactly that. Rather than me describe the issue let me hand you over to the correction issued by the ECB.
[Statement in CNBC interview after press conference:] I am fully committed to avoid any fragmentation in a difficult moment for the euro area. High spreads due to the coronavirus impair the transmission of monetary policy. We will use the flexibility embedded in the asset purchase programme, including within the public sector purchase programme.
By down she meant up etc….
This was issued because the statement detonated across Euro area bond markets with the Italian ten-year yield going from 1.3% to 1.8%. Actually as a result of what no doubt will be called “The Lagarde Bounce” the ten-year yield is now 1.88%. So just as the corona virus ravaged Italy needs a helping hand Christine Lagarde has kicked it in the teeth. In fact just like she did to Greece and Argentina. You might think there was a theme there and that such a theme would have stopped her appointment. But no and of course so much of the media joined in by lauding it. Sadly we have a sort of Marie Antoinette theme in play.
Meanwhile two bank subsidies were announced. Firstly the new liquidity measures announced that via the TLTRO banks will be able to get cash at interest-rates as low as -0.75% compared to the -0.5% of everyone else. As Gollum would say.
We wants it, we needs it. Must have the precious.
Also there was something tucked away in the rules so let me hand you over to JohannesBorgen on twitter
As pointed out by @borisg_work I forgot to remove our Brexited friends, so RWA are more likely around 14tn now (anyone has an accurate recent # i’m interested) which suggest between 500bn and 600bn – still very big!
Changes in the Risk Weighted Assets rules meant a boost of around 500 billion Euros of capital relief. He got a boost as the ECB press officer retweeted him so perhaps he explained their own policy to them.
As you can see this is a bit of a shambles. If you argue that this could be like 2008 then the central planners at least managed a concerted fusillade. This time around they are taking individual pop shots and in at least one case have shot themselves in the foot. Actually at the ECB things are going from bad to worse.
@bancaditalia governor #Visco @ecb will do more if needed and can front load purchases if needed. Thursday decision was “not the final word” and ECB policy is aimed to ensure adequate liquidity. in exclusive interview with @BloombergTV
Let me deal with it in terms of bullet points.
- Presumably the Governor of the Bank of Italy is furious
- What is the point of declaring a number and then saying not only it might be larger but also the timing could be faster only 24 hours later?
- Actually they declared the next meeting would not be until April Fools Day less then 24 hours ago.
- QE reduces bond market liquidity.
Looking at markets then equity markets are surging as I type this because the stimulus fairy has been deployed. Is that the same stimulus fairy that was supposed to appear in the Euro area yesterday or a different one please? But that is my point because as the swings get wider I am more concerned about a fund or funds blowing up. This week alone we have seen wild swings in the bond,oil,equity and gold markets so in fact I am surprised it has not happened and wonder if we are being told the whole truth?