The European Central Bank’s plans for €1 trillion of monetary stimulus is fraught with risk and is likely to fail without full-blown bond purchases, Standard & Poor’s has warned.
The agency said the ECB’s blitz of ultra-cheap loans to banks (TLTROs) cannot generate more than €40bn of net stimulus once old loans are repaid, given regulatory curbs imposed on lenders.
Jean-Michel Six, the agency’s chief European economist, said ‘doves’ on the ECB’s governing council know that the loan plan is unworkable but are going through the motions in order to persuade German-led ‘hawks’ that all conventional measures have been exhausted, even if this means a debilitating delay.
“Risks of a triple-dip recession have increased,” said Mr Six. “The ECB has one last arrow and that is quantitative easing of €1 trillion, needed to restore the M3 money supply to trend growth.”
After 6 weeks of the ECB’s (3rd) Covered Bond Purchase Program, the cumulative buys amount to a mere EUR 10.485 billion. It appears they are limited (by collateral availability and market liquidity.. and dealers unwillingness to sell) to around EUR3 billion per week - around the same amount The Fed’s QE3 would suck up in 1-2 days of POMO. At this rate, it’s a long way to go to reach the $1 trillion goal. Is it any wonder that Mario Draghi once again used the ‘w’ word – uttering ECB will do “whatever it takes” (cough within its mandate).
*DRAGHI SAYS ECB WILL DO WHATEVER IT TAKES, WITHIN ITS MANDATE
So just 6 more years of buying to reach $1 trillion?
It seems Draghi is getting desperate:
*DRAGHI SAYS EXPANDED PURCHASE PROGRAM COULD INCLUDE GOVT BONDS
The investment climate rests on three legs: the divergence that is characterized by the de-synchronized business cycle, the decline in commodity prices and a slowing of China. Data that underscores these factors appear to have stopped having much significance for investors.
At the same time, small changes to perceptions, like the downtick in the University of Michigan survey’s inflation expectations, can have seemingly out-sized market impact. Before the weekend, it reported that the five-year inflation expectation slipped through the 2.7%-3.0% range that has confined expectations over the past year or two. It now stands at 2.6%, the same the as the one-year expectation, which eased from 2.9%. It was sufficient to push US 10-year Treasury yields back to the lower end of their recent range (~2.30%), and sparked a pullback of the dollar.
The flash euro area PMI and ZEW survey, on the other hand, are most unlikely to change perceptions of the near stagnant economies. It will not alter ideas that policy makers have to do more to get back to a meaningful growth path. Some observers are emphasizing the possibility that the ECB announces some measures to increase the participation of the second TLTRO next month. And despite our claim that there is no agreed upon definition of quantitative easing, many say the ECB is slowly moving toward it. By that they mean the purchase of sovereign bonds.
The technical, legal and political obstacles remain formidable. There are several other classes of assets that the ECB can buy, including supra-nationals, corporates and non-covered bank bonds that are less cumbersome. Moreover, it is possible that the low point of inflation is at hand, and the second TLTRO will be considerably more successful than the first. Together they could be worth about 250 bln euros. Some of the second TLTRO may be used to pay back part of the LTRO funds outstanding, especially among Italian banks. >> Read More
Industrial production in the euro area rebounded by 0.6 per cent in September, after August’s gloomy 1.4 per cent contraction, but it undershot expectations and concerns over the continent’s economic health continue to simmer.
The eurozone’s economic recovery has spluttered badly this year, as all the biggest members have either stagnated or slumped back into recession.
Industrial production has been a particular weak spot across the common currency area. Italian and French production shrank in September, while Germany suffered a disappointingly weak rebound after August’s awful 3.1 per cent contraction.
The continued economic gloom and stubbornly low inflation in the eurozone has sparked speculation that the European Central Bank will eventually be forced to expand its quantitative easing programme to include buying sovereign government bonds – perhaps as early as next year.>> Read More
Europe’s volatility gauge has slipped below the 20 mark for the first time in just over a month, after the turmoil of October has subsided and traders look forward to more decisive action from the European Central Bank in the coming months.
The Vstoxx index, the European counterpart to Wall Street’s Vix, is a measure of the expected volatility of European stocks and is therefore seen as a yardstick of investor fear in the continent.
The gauge spiked to a two-year high of 31.52 last month, as European markets suffered some severe blows from the global turbulence that erupted as the Federal Reserve prepared to end its quantitative easing programme.
But the Vstoxx has come down sharply since and today fell to 19.8, which would be the first close below 20 since October 6.>> Read More
The European Central Bank has kept interest rates unchanged as its president, Mario Draghi, prepares to take questions on whether his management style is hampering efforts to engage in full-scale quantitative easing.
The governing council held its main refinancing rate at its record low of 0.05 per cent and continued to charge banks 0.2 per cent on a portion of their deposits parked with the central bank
Mr Draghi is unlikely to follow the Bank of Japan’s lead and announce government bond-buying later on today at the post-meeting press conference.
Most policymakers in Frankfurt want to review the impact of earlier attempts to stave off economic stagnation through private-sector asset purchases and offers of cheap central bank cash before launching new measures.
The ECB president could, however, firm up expectations that the central bank will bloat its balance sheet in a bid to convince the public it is serious about returning inflation from its current level of 0.4 per cent to its target of just below 2 per cent.>> Read More
Mario Draghi has finally overplayed his hand. He tried to bounce the European Central Bank into €1 trillion of stimulus without the acquiescence of Europe’s creditor bloc or the political assent of Germany.
The counter-attack is in full swing. The Frankfurter Allgemeine talks of a “palace coup”, the German boulevard press of a “Putsch”. I write before knowing the outcome of the ECB’s pre-meeting dinner on Wednesday night, but a blizzard of leaks points to an ugly showdown between Mr Draghi and Bundesbank chief Jens Weidmann.
They are at daggers drawn. Mr Draghi is accused of withholding key documents from the ECB’s two German members, lest they use them in their guerrilla campaign to head off quantitative easing. This includes Sabine Lautenschlager, Germany’s enforcer on the six-man executive board, and an open foe of QE.
The chemistry is unrecognisable from July 2012, when Mr Draghi was working hand-in-glove with Ms Lautenschlager’s predecessor, Jorg Asmussen, an Italian speaker and Left-leaning Social Democrat. Together they cooked up the “do-whatever-it-takes” rescue plan for Italy and Spain (OMT). That is why it worked.
We now learn from a Reuters report that Mr Draghi defied an explicit order from the governing council when he seemingly promised to boost the ECB’s balance sheet by €1 trillion. He also jumped the gun with a speech in Jackson Hole, giving the very strong impression that the ECB was alarmed by the collapse of the so-called five-year/five-year swap rate and would therefore respond with overpowering force. He had no clearance for this.
The governors of all northern and central EMU states – except Finland and Belgium – lean towards the Bundesbank view, foolishly in my view but that is irrelevant. The North-South split is out in the open, and it reflects the raw conflict of interest between the two halves.
You can almost hear the great wheels of global monetary policy making turning: change is afoot in each leading central bank. The US Federal Reserve has bought its last long-term bond. The Bank of England is talking down the prospect of rate rises (after talking it up not long ago). The Bank of Japan is speeding up money creation. Even the European Central Bank is creeping towards asset purchases.
This is not a bad time to assess how much we can demand from central banks. It is fashionable to say monetary policy is “overburdened” and only fiscal policy can help depressed economies out of their rut. I do not dispute the importance of using fiscal policy where there is room for manoeuvre (as in the eurozone as a whole, where the fiscal deficit is only 2.5 per cent of output). Structural reforms are needed, too. But we should take issue with the idea monetary policy has done as much as it can.
The notion that developed economies are in a “liquidity trap” – where printing money no longer has any effect – is treacherous. The problem is partly semantic but semantics can shape politics. A trap is hard to spot and difficult or impossible to escape. The implication is that monetary policy makers have done everything possible. In liquidity trap models of the economy, the central bank is impotent. Although it can create money at will, this power no longer provides influence over interest rates or the ability to give the economy a boost. >> Read More
After central bank action this week from the Federal Reserve, Bank of Japan, and Reserve Bank of New Zealand, two major European central banks take centre stage in the week ahead.
In the US, the latest check on the labour market and a dose of politics are in store.
Here’s what to watch for:
All eyes are set on the monthly non-farm payrolls report due next Friday. The US economy is expected to have added 234,000 jobs in October, while the unemployment rate is projected to remain unchanged at 5.9 per cent.
Other key economic reports set for release next week include the ISM manufacturing survey and the trade balance. Also out next week: auto sales for October.
US mid-term elections
Republicans will try to take control of the Senate in the US mid-term elections next week. The results will have implications for the last two years of President Barack Obama’s term in office.
Polls show Republicans have a slight edge, although key races in Georgia, Iowa and Kansas could end up swinging the election in Democrats favour.
European Central Bank
The ECB is expected to keep its main refinancing rate unchanged at 0.05 per cent when it announces its decision on Thursday. Markets will be listening for comments from ECB president Mario Draghi on speculation that the central bank will start to purchase corporate bonds.>> Read More