The ECB must be noting the Euro area slow down with dismay

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by Shaun Richards

Yesterday we noted the communications problems of the Bank of England as it performs the dance known as the Hokey Cokey on the subject of negative interest-rates. Today we have the opportunity to note what the European Central Bank which applies what is negative interest-rate policy or NIRP 2.0. What do I mean by that? Well it has had negative interest-rates since the 11th June 2014 and the Deposit rate is now -0.5%. But due to the negative impact of this in the banks they have introduced a -1% interest-rate for them as the ECB attempts to shovel cash to The Precious. This is the 2.0 part.

The next issue is how is this going? So let me hand you over to Yves Mersch who has been interviewed by Bloomberg today.

I must say that since the last time we took action, the least one could say is that things in the economy have not gone for the worse. And even with sometimes conflicting incoming information, most of it has led us to say that the risk balance may still be somewhat to the downside but less so than it has been, and that led us to no change because we said we are broadly in line with our baseline.

Looking also at new incoming information I think nothing is pointing to a further deterioration at least not on the front of prices and production.

Of course he quickly moved onto the subject of the banks.

The second element of uncertainty is the feedback from the banking sector, let’s call it the financial amplification. Measures have been taken and this is not only measures from the monetary policy side: collateral, ample liquidity, the TLTROs, tiering PEPP. It is also the supervisory actions, the regulatory adjustment

This reminds me of Monday’s press release on the banks.

The ESCB report proposes to reduce the reporting burden for banks in the fields of statistical, resolution and prudential reporting without losing the information content that is indispensable to monetary policy, resolution and supervisory tasks.

I do not know about you but in a situation where Deutsche Bank has been alleged to be the largest player ( US $1.3 trillion) in a money laundering scandal this is not the best time for such an announcement.

Today’s Evidence

The Markit PMI for the Euro area posed a question about the Mersch view above.

Business activity stalled across the eurozone in
September, albeit with increasingly divergent trends
by sector and country. Faster growth of
manufacturing, led by Germany, was offset by a
renewed downturn in the service sector, which was
often linked to resurgent coronavirus disease 2019
(COVID-19) infection rates.

We see that according to Markit manufacturing in Germany is growing ( 56.6) but France is finding things tougher.

France meanwhile saw business activity
deteriorate for the first time in four months as falling
service sector output more than offset a modest
rise in factory production.

The reading of 48.5 was driven by the services sector (47.5). It contrasted quite a bit with the 53.7 recorded by Germany.

These numbers and readings need a fair bit of qualification these days, as they too have had problems. The first is that they simply tell us the difference between last month and this means that rather than continuing to recover the economy has stalled.

We may learn a little from the employment view because the official data is frankly useless right now due to the definitions not allowing for things like furlough schemes.

Employment was meanwhile cut for a seventh
successive month. Although the rate of job losses
moderated further from April’s record peak, the
pace remained higher than at any time since June 2013 prior to the pandemic. An easing in
manufacturing job cutting to the lowest since
February contrasted with a slight increase in the
rate of job losses in services, reflecting the
divergent business activity trends between the two
sectors. Reduced staff cuts in Germany and France
were partly countered by greater job losses in the
rest of the region.

So we see a slowing economy with falling employment which I think is the most we can take from a PMI release.

The Green Green Grass of Home

Meanwhile the ECB is about to get active in other areas.

A journey of a thousand miles must begin with a single step. ( Isabel Schnabel )

which relates this this announcement.

The European Central Bank (ECB) has decided that bonds with coupon structures linked to certain sustainability performance targets will become eligible as collateral for Eurosystem credit operations and also for Eurosystem outright purchases for monetary policy purposes, provided they comply with all other eligibility criteria.

However I think Yves Mersch covered it in his interview.

Of course the markets like if we buy up everything that they have.

I have two main views on this. The first is that such matters are decisions for elected politicians and governments not technocrats looking for good PR. So it is a type of mission creep. Next comes the issue that we need large improvements in our ability to store energy for this to work. As we stand that relies on battery technology and as yesterday was Tesla Battery Day let me hand you over to Wired.

To be sure, Tesla’s new battery appears to offer large performance gains in a few key areas, but it was unclear whether Tesla has actually achieved these upgrades or whether this is the projected performance for the finalized battery.

To be fair to Yves Mersch he has his own concerns.

The difficult part is the circumscription, definition, there’s a lot of greenwashing going around as well


As the ECB stretches for the outer limits of monetary policy we are being taught a different type of limit. Let me give you an example which would have been regarded as a triumph in its early days and indeed some are promoting it as one this morning.

AMSTERDAM, Sept 23 (Reuters) – Italy’s 30-year bond yield fell to a record low on Wednesday…….Italian bond yields tumbled on Tuesday and on Wednesday the 30-year yield dropped to as little as 1.76% in early trade .

So relative to Germany which is the benchmark bond yields have tightened which ceteris paribus is a success for the Euro ( more consistency of interest-rates). In a market sense it is indeed very welcome for those punting, or excuse me, investing in it.As I do not get the opportunity to type this very often it is some good news for Italian banks who hold lots of Italian government bonds. It is also good news for the Italian government which can borrow more cheaply.

The catch is that it is being driven by the purchases of the ECB. It has two programmes buying government bonds. But the crucial point is more than this because if we move to expectations markets expect the ECB to be not only a buyer of last resort but currently a buyer of first resort. Also my financial lexicon for these times will expect the purchases to be permanent.

It is subject to constraints vetted by the ECJ, and it is temporary as we have already once suspended it. The PEPP is exceptional and therefore temporary.  ( Yves Mersch )

But if we switch to the real economy we see another type of limit which is that economic growth was poor pre pandemic and now the recovery from the drop is fading. So markets can be manipulated but economies are still in trouble.

However maybe in the morass there are some seeds of hope as I note this from Yves which would be quite an improvement.

Another question is whether we collect only prices of goods and services, or should look into experiences with a cost of living index rather than a CPI.



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