In ordinary times the 25 members of the Governing Council of the European Central Bank would be getting ready to go to Frankfurt. This time though, they may well be making sure their version of Zoom works properly.I do hope they are not using Zoom itself as it is not secure meaning that the hedge funds will be listening in again. As to there being 25 members it has an Executive Board of 6 as well as a representative of each country. Rather confusingly not all vote as there are too many to sit around the ECB table and around 4 drop out with the most significant being the Netherlands this time around. But as the main decisions have already been made and only perhaps some fine tuning in the offing that is a moot point this week.
Money Supply
This morning has brought news on past decisions however. In the melee it is easy to forget that before the pandemic the ECB had restarted QE and then fired something of a peashooter on the 12th of March.
A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes
So strong in fact that only 6 days later they announced this.
This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).
These will have fed into the March data because the PEPP began on the 26th and the original much more minor “strong contribution” will have been in play for around half of the month. So what impact did they have?
Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 10.3% in March from 8.1% in February.
Putting it another way M1 increased by 276 billion Euros to 9335 billion in March. As this replaced 24 billion in January and 89 billion in February we see two things The accelerator was already being pressed but then the foot pressed down much harder. As an aside cash rose by 26 billion in March which backs up to some extent my argument of yesterday about it. A clear rise but of course only one month.
Broad Money
As you can see this soared as well.
Annual growth rate of broad monetary aggregate M3, increased to 7.5% in March 2020 from 5.5% in February.
If we take the advice of Kylie ( I’m breaking it down) we see this.
Looking at the components’ contributions to the annual growth rate of M3,, the narrower aggregate M1 contributed 7.0 percentage points (up from 5.5 percentage points in February), short-term deposits other than overnight deposits (M2-M1) contributed 0.0 percentage point (up from -0.1 percentage point) and marketable instruments (M3-M2) contributed 0.5 percentage point (up from 0.1 percentage point).
So we see that the QE push is such that this time around broad money is effectively narrow money. We can ignore M2 which is doing almost nothing but then we see marketable instruments are in the game as well albeit more minor at 34 billion Euros. Indeed this is almost entirely debt-securities with a maturity of up to two years. I am picking them out because their total is only 60 billion so they have seen more than a doubling in one month.
Counterparts
We can do this almost MMT style and do indeed learn a thing or two.
the annual growth rate of M3 in March 2020 can be broken down as follows: credit to the private sector contributed 4.5 percentage points (up from 3.7 percentage points in February), net external assets contributed 2.1 percentage points (down from 2.7 percentage points), credit to general government contributed 0.6 percentage point (up from -0.7 percentage point), longer-term financial liabilities contributed -0.2 percentage point (up from -0.5 percentage point), and the remaining counterparts of M3 contributed 0.4 percentage point (up from 0.3 percentage point).
Care is needed as this sort of application of mathematics to economics is invariably presented as a type of Holy Grail followed by the sound of silence when it then goes wrong. But we do see that the credit impulse is now much more domestic as the foreign flows decline in absolute percentage terms and then have a second effect of being compared to a larger number.
What about credit flows?
The initial impact is a swing towards the public sector as we see credit there taking quite a move.
As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 3.5% in March 2020 from 2.0% in the previous month. The annual growth rate of credit to general government increased to 1.6% in March from -2.0% in February, while the annual growth rate of credit to the private sector increased to 4.2% in March from 3.4% in February.
The growth rate had been negative since last June and I expect quite a surge now because it was 15.7% at its peak in the credit crunch and we see so much fiscal policy being enacted.
Switching to the private-sector we lack the detail to really take a look.
The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) increased to 5.0% in March from 3.7% in February. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.4% in March from 3.7% in February, while the annual growth rate of adjusted loans to non-financial corporations increased to 5.4% in March from 3.0% in February.
We learn a couple of things. There will be a lag before we pick up the fall in mortgage lending and new business lending was a record.
New bank loans to euro area non-financial corporates in March: +€118bn. Previous record was €66bn in December 2007………French banks were the largest contributors (€38bn in new corporate loans out of €118bn total) but the rise was fairly broad-based: Germany €22bn; Italy €17bn; Spain €16bn. ( @fwred)
This goes as follows. Good as banks are lending to companies but then Bad as we think why they want it and can they pay it back?!
Comment
These numbers matter because they give us a good idea of what is coming around the economic corner. For example narrow money growth impacts the domestic economy in somewhere between a few months and six months ahead. We have not seen double-digit-growth for a while and when we last did we got the Euro boom of 2017/18. Except these are about as far from ordinary times as we have seen and we are seeing the carburetor being flooded with petrol and the economy stalling. Putting it back into monetary terms velocity seems set to collapse again.
Another perspective is provided by the “pure” broad money growth which is the monetary equivalent of incestuous. Why? Well those short-term securities look as if they might be designed to be bought by the PEPP programme.
To expand the range of eligible assets under the corporate sector purchase programme (CSPP) to non-financial commercial paper, making all commercial papers of sufficient credit quality eligible for purchase under CSPP.
(3) To ease the collateral standards by adjusting the main risk parameters of the collateral framework. In particular, we will expand the scope of Additional Credit Claims (ACC) to include claims related to the financing of the corporate sector.
More recently there has been this.
ECB to grandfather until September 2021 eligibility of marketable assets used as collateral in Eurosystem credit operations falling below current minimum credit quality requirements
In case you are wondering why? I am thinking Italy and Renault but I am sure there are others.
Moving on let me highlight a catch in this Such programmes will help big business but what about the smaller ones? We are back to the zombie culture and perhaps zombie money supply growth.