Normally we look at macroeconomic news to provide the incremental additional information that shapes the expected returns on investments. However, in the week ahead, the macroeconomic data is of less importance than the reaction function of policymakers. What we mean by this how policymakers will respond to the recent data may be a bigger driver of financial assets than the new data.
Recall that the ECB staff cut its growth and inflation forecasts. Is that not a necessary pre-condition for a policy response? Japan recently reported an unexpected decline in industrial output and the BOJ’s core inflation measure (excludes fresh food) slipped back into negative territory for the first time since April 2013. Is this something that monetary policy can address or should fiscal policy? Will the apparent pick-up in wage pressure in the UK over the past few months push the Bank of England toward a more hawkish posture?
The Federal Reserve officials were likely as surprised by the weakness of the September jobs report as were market participants. There was nothing in the ADP estimate or weekly jobless claims that had hinted at the weakness. Did the disappointing jobs data really redeem the Fed was criticized for not raising rates last month? Will the jobs data be understood by the central bank as a sign that the economy is deteriorating, as the cynics have argued, and require additional monetary stimulus in the form of new asset purchases as former Treasury Secretary Summers and others have claimed?
There are three major central banks that meet in the week ahead. They are the Reserve Bank of Australia, the Bank of Japan, and the Bank of England. None is expected to change policy. If there is a surprise, the Reserve Bank of Australia is a most likely candidate. The policy has been on hold since May. The headwinds emanating from China and through a negative terms of trade shock are still feeding through the economy. However, with recent economic data firm, and the Australian dollar chopping around its recent trough, the RBA need not be in a hurry to cut rates now.
Whatever the economic question, central bankers aren’t the answer
European Central Bank governing council member Benoit Coeure to MNI today:
“European needs innovation; the ECB can’t provide this.”
It’s not just a European thing but everyone infatuated with the idea that central bankers can do something for the economy. We’ve already gone deep down the central bank wormhole over the past 7 years into dangerous, experimental policy while politicians are repeatedly let off the hook.
Governments are the only way to stimulate long-term growth and the best way to do it is to educate, stabilize and help innovators innovate.
Japan has failed to make any hard choices for a generation and now it has the national pension fund buying junk bonds and the BOJ thinking about yet-another round of QE. Here’s a better idea, make it easier for women to go to work. Open up industry to competition. Allow some immigration.
European politicians want the ECB to magically make the economy grow and inflation appear when they’ve built up unfathomable bureaucracy driven by hordes of politicians when one lady is calling all the shots anyway.
Our thesis over the last few years has basically been that the global financial system/economic fundamentals are so bad that its good for financial assets given it forces central banks into extraordinary stimulus and for them to continue to buy assets in never before seen volumes. The system failed in 2008/09 and rather than allow a proper creative destruction cleansing, policy makers have been aggressively propping it up ever since. This has surely led to a large level of inefficiency in the system which helps explain weak post crisis growth and thus forces them to do even more thus supporting asset prices if not the global economy.
However since the summer this theory has been severely tested by China’s equity bubble bursting, China’s small ‘shock’ devaluation and the start of a rundown in reserves for the first time in over a decade. We’ve also seen associated commodities and EM woes, endless unsettling speculation about the Fed’s next move and more recently the idiosyncratic corporate scandal around VW and funding concerns around Glencore. The hits keep on coming. Is it now so bad it’s actually bad again?
The most recent leg of the sell-off begun after the Fed held rates steady two weeks ago as the narrative focused on either this reflecting worrying economic concerns or a Fed that is a slave to financial markets and losing credibility. So do we think we’re now entering a period where central banks are increasingly impotent? The answer is that they have been for a while on growth so not much has changed. However they can still buy more assets and continue to keep policy loose. Although we don’t think QE and zero interest rates does much apart from prop up an inefficient financial system it’s all we’ve got until we have a huge policy sea change which probably only happens in the next recession (more later).
The European Central Bank has suspended buying bundles of loans backed by Volkswagen assets as it reviews the financial implications of the scandal engulfing Germany’s biggest carmaker.
The plunge in VW shares buy almost a third in 10 days has prompted the central bank to review whether to bar VW paper from its bond purchase programme.
Such credit reviews are a routine part of the ECB’s efforts to protect taxpayers as it rolls out its scheme to buy asset-backed securities, which began in November last year.
But the fact that VW, one of Europe’s biggest issuers of debt, is under the microscope underlines the severity of the problems faced by the group, and the potential knock-on funding effects of the scandal.
Shareholders raced to offload VW stock last week after US regulators revealed that the company rigged US emissions tests for its diesel cars by using so-called defeat devices. The allegations forced the departure of VW’s chief executive and rocked Europe’s carmaking industry.
Markit is painting a bright picture of business in the eurozone, with the best quarter in four years, despite a dip in September. The figures may be too bright to encourage the European Central Bank from pumping in more easing, the research company said.
Markit says, with the release of its purchasing managers index covering the views of 5,000 companies, that its surveys
pointed to steady growth of the eurozone economy at the end of the third quarter. Moreover, faster growth of new work and backlogs of orders point to continued expansion in coming months.
The surveys track sales, employment, inventories and prices to try and offer a compete picture of the private sector economy.
The first reading of Markit’s services activity index dipped to 54 from 54.4 in August, while the manufacturing index slipped to 52 from 52.3.
France lagged the upturn, but did see growth pick up in September.
Chief economist at Markit Chris Williams said:
The ECB would no doubt like to see more bang for their euros as far as stimulus from their QE programme is concerned, but it’s debatable whether these numbers are weak enough to convince the central bank to take more aggressive action just yet.
France remains a particular concern. The PMI data signal 0.4% growth of the German economy in the third quarter, but a mere 0.1% expansion in France.
The first rule of Fight Club is: You do not talk about Fight Club.
The second rule of Fight Club is: You DO NOT talk about Fight Club.
Well, no more.
The European Central Bank will allow national central banks across the eurozone to make announcements about emergency funding disbursed to banks under their purview, according to a statement on Wednesday.
Official announcements on Emergency Liquidity Assistance, the so-called ELA, were closely scrutinised as Greece teetered on the brink of exit from the European Union. National central banks will still need approval from the ECB to disburse funding to banks.
In its statement, the ECB wrote:
The Governing Council of the European Central Bank has decided that national central banks will from now on have the option to communicate publicly about the provision of Emergency Liquidity Assistance (ELA) to the banks in their country, in cases where they deem that such communication is necessary.
To be sure, there’s something terribly ironic about the central bank for central banks telling the world that the market is too dependent upon central banks, but then again, the Bank for International Settlements isn’t exactly shy about making scary-sounding declarations and criticizing its board members (listed below) in its “closely-watched” (if only by those who are aware of the institution’s shadowy existence and give any credence to what they say) quarterly reviews.
The BIS serves to encourage and perpetuate the power and prestige of the world’s central bankers and provides a top secret forum for the monetary policy cabal to meet and commiserate safe at all times from the prying eyes of those to whom the bankers should by all rights be accountable.
In this context it’s somewhat absurd that the bank’s reports — which, as a reminder, are required reading in treasury departments and monetary policy circles around the globe — contain scathing critiques of the very same policies which were no doubt devised, tweaked, and honed over dinner and fine wine in Basel. Nevertheless, the BIS’ latest tome is replete with criticism for the idea that the very people who make up the bank’s Board of Governors are indeed omnipotent.
Last year alone for instance, the bank warned of a “puzzling” disconnect between the economy and “euphoric” markets, excessive risk taking and depressed volatility fostered by ultra accommodative monetary policy, and the effect of a strong dollar on the solvency of EM corporates. Earlier this year, the BIS joined the cacophony of analysts, pundits, and commentators suddenly screaming about the absence of liquidity in corporate credit markets.
The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.“
Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”
So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail”, was correct. Namely this:
… the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.
… while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.
Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.
After a volatile few weeks in global financial markets, focus returns to the US labour market and central bankers in Europe.
This week brings the latest report on the US jobs market, which may sway policymakers at the Federal Reserve as they consider lifting rates. Investors will also scrutinise comments from the European Central Bank as some strategists call for additional easing.
Here’s a preview of what to expect in the coming days.
Economists project that employers added 220,000 jobs in the US in August, roughly in line with the 215,000 jobs created the previous month. The report, to be published on Friday, is also expected to show the unemployment report dipped to 5.2 per cent from 5.3 per cent.
Recent market volatility has cast a cloud over the timing of the Federal Reserve’s first rate rise since the financial crisis. Ahead of his keynote speech in Jackson Hole, Wyoming, this weekend, Stan Fischer, vice chair of the Federal Reserve told CNBC:
We have a little over two weeks before we make a decision. We have time to wait and see the incoming data. If a decision is close it will be influenced by data that’s come in recently.
The minutes of the July meeting of the European Central Bank’s top rate setters has just been released. fastFT has sifted through them for some key extracts.
The full minutes of the July 15-16 meeting of the ECB’s Governing Council are here.
On the outlook for growth
The balance of risks to the economic outlook for the euro area was seen to remain on the downside.
The outlook for net exports, while benefiting from lower energy prices and improved price competitiveness, remained subject to downside risks related to a possible reversal of recent energy price and exchange rate developments, as well as lower than expected global trade growth. In particular, financial developments in China could have a larger than expected adverse impact, given this country’s prominent role in global trade.
On the need for structural economic reforms
It was recalled that a sustained improvement in the outlook for economic growth, beyond a cyclical recovery, was not in the hands of monetary policy but required determined contributions from other policy areas, including fiscal policy and structural reforms.