Trouble is brewing at the ECB

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by Shaun Richards

Sometimes what are presented as events in the news cycle that are unrelated are in fact significant. So let me draw to your attention some tweets from Bloomberg yesterday evening.

BREAKING: Sabine Lautenschlaeger resigned from the ECB Executive Board more than 2 years before the official end of her term.

This is a significant event in several ways. Firstly why leave such a prestigious job? Also in the structure of the ECB an executive board member is more powerful than a central bank governor. This is because they vote at every policy meeting whereas central bank governors now rotate For example I quoted from a speech yesterday from the Governor of the Bank of France Francois Villeroy where he declared his views on the recent policy change at the ECB. But whilst he was present at the meeting he did not have a vote. One of the quirks of the 2019 calendar is that the President of the Bundesbank will not be voting at three meetings but the Governor of the Bank of Malta will vote at all but one.

If you think about it the power of the President of the ECB was raised by the rotation of voting rights of central bank Governors as he or as it will soon be she can choose when to bring a vote.

Moving back to Sabine Bloomberg carried on.

MORE: The shock move that comes amid the biggest dissent over monetary policy in Mario Draghi’s tenure. The German policymaker is stepping down on Oct. 31 and the ECB gave no reason for her decision.

Then they tried to put some more meat on that particular bone.

Latest: Sabine Lautenschlaeger’s surprise exit from the ECB follows a trend of early exits by German policy makers. Her move echos the frustrations of the savings-oriented nation with loose policies by the central bank.

Missing from that description is the fact that Sabine will be resigning just as Christine Lagarde starts. I do not know about you but that seems rather significant. Whilst it seems likely that Sabine has not agreed with some and maybe many of the policies of Mario Draghi it is noticeable that she is serving his full term and departing before the arrival of Lagarde. Something that those who have been accusing her of flouncing out of the ECB might do well to consider.

A German Issue

There is of course a long-running one which bond vigilantes on Twitter have highlighted this morning.

Headlines in Munich this morning: German savings banks (Sparkassen) are closing client accounts as they can’t afford to pay interest on them with negative @ecb  rates.


Money Supply

These numbers should be welcomed at the Frankfurt towers of the ECB but I suspect it may well follow the phrase used on BBC TV of “look away now”.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 8.4% in August from 7.8% in July.

So my signal for short-term monetary trends is looking stronger which continues the pattern we have seen this year so far. For newer readers narrow money changes tend to impact the economy some 3-6 months ahead. Putting it another way we have gone back to February 2018 as that is when annual growth was last at this level.

If we look back to the “Euro boom” we see that M1 growth peaked at 11.7% in July 2015 as the impacts of large-scale QE and negative interest-rates arrived and then faded away to single digits of 8% and 9%. So we are at the bottom of that range. This of course poses a real question for the change of ECB policy and makes me wonder again about the resignation above.

Broad Money

We saw a similar drumbeat from these numbers earlier.

Annual growth rate of broad monetary aggregate M3, increased to 5.7% in August 2019 from 5.1% in July (revised from 5.2%).

There is a similar pattern here of improving numbers in 2019 and we are quite some distance away from the recent low which was 3.5% in August 2018. But there is a further twist as we note that the number is now higher than at any phase in the “Euro boom” phase.

As to the detail it is M1 dominated as you might expect.

The annual growth rate of the broad monetary aggregate M3 increased to 5.7% in August 2019 from 5.1% in July, averaging 5.1% in the three months up to August. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 8.4% in August from 7.8% in July. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) increased to 1.0% in August from 0.1% in July. The annual growth rate of marketable instruments (M3-M2) was -2.9% in August, compared with -1.6% in July.

We have some growth as we move broader but not much and we see that the widest part fell. So there is a fly in the ointment but it is also true that there was a large wadge of ointment this month.

There is another way of looking at the numbers and let me first state that using such analysis in the UK went dreadfully wrong a couple of decades or so ago.

 the annual growth rate of M3 in August 2019 can be broken down as follows: credit to the private sector contributed 3.4 percentage points (up from 3.2 percentage points in July), net external assets contributed 3.0 percentage points (up from 2.9 percentage points), credit to general government contributed -0.2 percentage point (as in the previous month), longer-term financial liabilities contributed -1.0 percentage point (up from -1.1 percentage points), and the remaining counterparts of M3 contributed 0.5 percentage point (up from 0.3 percentage point).

The concern in this area is the contribution of money flows from abroad to the growth seen.

The Euro

This is drifting lower at the moment and is 1.093 versus the US Dollar as I type this. Much of this is a phase of “Holla Dolla(r)” because it has been rising generally but that suits the ECB, Putting it another way there has been very little movement this week versus the UK Pound as I set a benchmark at 1.131 before the Supreme Court decision in the UK as opposed to the 1.126 as I type this.


When I see the monetary numbers today and think of the recent move by the ECB I am reminded of this from Cypress Hill.

Insane in the membrane
Insane in the brain!
Insane in the membrane
Insane in the brain!

There is a perfectly valid question which goes as follows. Why with money supply growth like this do prospects look so weak? The first part of the answer is that narrow money looks around 6 months ahead and broad 18/24 months ahead so ot is yet to come. The next is that no measure tells us everything and good monetary prospects tell us about domestic inputs and impetus in the Euro area but very little about exports of cars to China for example.Then there is another catch. It is a choice how much notice you take of money supply data but to my mind a central bank must follow it and if it things it is misleading explain why it thinks so? Because we have just seen policies to improve money supply growth when in the case of broad money it is in fact stronger than in the “Euro boom”. The August numbers may be a one month fluke but the trend is not. But as we stand the polices just implemented are pretty much irrelevant for a trade war driven slow down signalled by this from Markit earlier this week.

Flash Eurozone Manufacturing PMI Output
Index(4) at 46.0 (47.9 in August). 81-month low.

So a manufacturer can maybe borrow a bit cheaper which is good in itself but if they still cannot export to China then it is of not much use.

Me on The Investing Channel



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