The focus switches today to the Euro area and the ECB. This is not only because we wait to see if ECB President Lagarde will make yet another gaffe but because things changed in the central banking space somewhat yesterday. So let us take a journey across the Atlantic to Canada.
Our forward guidance continues to be reinforced and supplemented by our quantitative easing (QE) program. We decided to adjust the program to a target of $3 billion weekly net purchases of Government of Canada bonds. That is down from a minimum of $4 billion per week, while we will be maintaining broadly the same maturity composition of our purchases.
As you can see the Bank of Canada has decided to trim or taper its bond purchases. That is far from unique as for example the Bank of England has reduced its weekly purchases along the way to the present £4.4 billion, but it does contrast with the ECB.
Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.
That was from the last press conference on the 11th of March. However in spite of a long and convoluted explanation from President Lagarde nobody seems to have told the bond buyers. So here is @fwred on this week’s numbers.
Aaand another NOT significant net weekly ECB PEPP number (€16.3bn purchases per week, or €3.3bn per day, in line with the old normal regime). We’re all in for the jokes and nuances, but this is becoming an embarrassment, and an issue for the ECB’s credibility.
Some have responded by pointing out that the gross purchases at over 28 billion were the highest since last June. But that is not really the metric and anyway you know which bonds are going to mature by simply looking at the calendar. So we end up Genesis.
Can’t you see this is the land of confusion?
It goes without saying that this is another Forward Guidance fail where more purchases were promised but have not happened. In the meantime other central banks have begun to move in the other direction! Although this exposes another issue as the ECB cannot issue an economic forecast like this.
Overall, we now project that the economy will expand by around 6½ percent this year, slowing to about 3¾ percent in 2022 and 3¼ percent in 2023.
So we have an awkward situation for the ECB. There are nuances here as the Bank of Canada is partly responding to a roaring housing market
While the resulting house price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behaviour.
Also it has an economy being boosted by higher commodity prices including lumber. But whichever way the ECB twists here it has trouble.
Interest-Rates
This is another issue again highlighted by the Bank of Canada.
. Based on the Bank’s latest projection, this is now expected to happen some time in the second half of 2022.
So we could see an interest-rate increase then. I say could because central banks pursue plans for interest-rate cuts with far more enthusiasm than rises. But the ECB has a deeper issue which is that it did not raise interest-rates even in the Euro Boom of 2017/18. Is it trapped in the icy cold world of negative interest-rates? It has not raised interest-rates for a decade now.
Economic Outlook
Today has brought a couple of hints and it started in the Netherlands.
In February 2021, consumers spent 10.7 percent less than in February 2020, reports the CBS. The contraction is smaller than in January, when consumers spent 12.0 percent less than a year earlier. As in previous months, consumers spent less on services. With the closing of all non-essential stores on December 15, spending on durable goods also shrank exceptionally. ( Netherlands Statistics)
As you see the lockdown has hammered the figures although some confidence seems to be now returning.
The mood among consumers was less negative in April 2021 than a month earlier, reports the CBS. Consumer confidence was -14, against -18 in March 2021. For the first time after December 2018, consumers were positive about the future economy again.
There was something else to cheer the ECB today.
Existing owner-occupied homes were 11.3 percent more expensive in March than twelve months previously. That is the largest price increase after May 2001. The price increase moderated somewhat in 2019, but picked up again in 2020.
It seems they are following the Canadian model of soaring house prices. We get some more perspective from this.
Compared to the trough in June 2013, prices in March were 62 percent higher.
The index which was set at 100 in 2015 is now at 153.9. Those of you who have followed my reports on house prices in the Netherlands will know that they were considered increasingly unaffordable. Well they have just got a lot more expensive as people have got poorer.
Next up was France as we got told this.
In April 2021, the business climate in retail trade and in trade and repair of vehicles as a whole has deteriorated markedly, in connection with the third lockdown. At 90, the indicator that synthesizes it has lost 5 points and has approached its level of last February……According to the business managers surveyed in April 2021, the business climate in services has deteriorated At 91, the business climate indicator that synthetizes it has lost 3 point ( Insee)
Manufacturing is doing better but the overall business index is at 95 giving an impression of a French economy that is struggling again at the moment.
Then we got an update on Italy.
In February 2021 the seasonally adjusted turnover index increased by 0.2% compared to the previous
month (+0.9% the domestic market and -1.3% in non-domestic market)……..With respect to the same month of the previous year the calendar adjusted industrial turnover index increased by 0.9% (+2.3% in domestic market and -1.8% in non-domestic market).
Whether there was a subliminal influence in the order as we started with core Netherlands followed by nearly core France and then Italy I do not know. But France especially seems to be struggling again.
Comment
To my mind there are two types of issue for the ECB. The first is that it needs to sort out its policy and how it wishes to present it. There is an irony here as President Lagarde opened her tenure with a promise to sort this out and has ended up with a shambles. In essence it is not hard as the ECB’s role is essentially to finance this.
In 2020, the government deficit of both the euro area and the EU increased significantly compared with 2019, as
did the government debt, in the context of the measures undertaken in response to the COVID-19 pandemic. In the
euro area the government deficit to GDP ratio rose from 0.6% in 2019 to 7.2% in 2020………. In the euro area the government debt to GDP ratio increased from 83.9% at the end of 2019 to 98.0% at the
end of 2020, ( Eurostat)
Also if the Financial Times is any guide to help finance the plans of her predecessor.
Italy’s prime minister, Mario Draghi, will next week announce a €221bn recovery package for a radical restructuring of the country’s economy as it seeks to bounce back from its deepest recession since the second world war.
The next issue is the level of the Euro so that also counts against any tapering of QE. The Canadian Dollar had a strong day yesterday so that gave a signal of what might happen and the ECB is supposed to be pushing the Euro lower.
But if we step back there is a much deeper crisis here. Many countries were facing an issue of lack of economic growth pre pamdemic but the Euro area especially so. The present Covid wave and vaccine go slow means it us set to be one of the last to get back to normal. But what if we go back to slow/no growth? The ECB is trapped in a cycle of QE and negative interest-rates and perhaps via a digital Euro even lower interest-rates and thus presumably even higher house prices. As Elvis so famously put it.
We’re caught in a trap
I can’t walk out
Because I love you too much, babyWhy can’t you see
What you’re doing to me
When you don’t believe a word I say?