Mon, 26th June 2017

Anirudh Sethi Report


Archives of “European System of Central Banks” Tag

Both ECB And BOJ Are Just Months Away From Running Out Of Bonds To Buy

With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.

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Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…

… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.

Draghi says risks of deflation have largely disappeared

Draghi statement to IMFC

  • Growth in the Eurozone is firming and broadening
  • There are sign of a somewhat brighter global recovery and increasing global trade
  • Cannot yet have confidence that a sustained rise in inflation will materialize in a sustainable manner
  • Underlying inflation has not shown a convincing upward trend

You could say he’s cautiously optimistic.

Earlier in the year, the market read the optimism as a sign of potential action to tighten but officials have fought back against that idea, and that’s what helped to cap the euro at 1.09.

“As underlying inflation remains subdued and the path of inflation crucially dependent on the prevailing very favourable financing conditions, we cannot yet have sufficient confidence that a sustained adjustment in inflation will materialize in a durable manner,” he wrote.

It’s a similar line to what he said after the March 9 ECB meeting. The next ECB meeting is April 27.

Draghi’s inflationary headache: analysts react to eurozone’s 2% inflation

A novel dilemma for the European Central Bank to contend with: above target inflation.

Prices in the single currency area have climbed by 2 per cent on the year for the first time in over four years, posing a fresh headache for the ECB’s dovish policymakers who will mark their two-year quantitative easing anniversary next week.

At the ECB’s latest meeting next Thursday, president Mario Draghi will face the task of convincing his more hawkish colleagues that the current leap in annual prices – from 1.8 per cent in January – is unlikely to be sustained having been driven by volatile energy costs. The central bank, which has been battling with more than three years of low prices, targets inflation of just under 2 per cent.

Despite the recent upsurge in inflation driven by higher oil prices Pete Vanden Houte at ING thinks inflation will begin to stabilise over the coming months. If anything, he says the ECB will opt to let inflation run above target to compensate for years of weak prices:

There is little doubt that the ECB will continue to be criticized for its loose monetary policy, especially in the core countries. But the bank will no doubt recall that the inflation target has to be reached over the medium term and for the whole of the Eurozone. If anything the ECB is more likely to err on the side of inflation, to compensate for the fact that consumer price increases have significantly undershot the ECB’s target for now 4 years in a row.

We therefore don’t see any change in monetary policy this year. However, in the third quarter, the ECB might announce its exit strategy, which in our view will probably entail a new extension of the QE program until mid-2018, but with some tapering included.

Reuters Trial Balloon: ECB “Almost Certain” To Keep Buying Bonds Beyond March

It has been a while since we had an ECB-linked Reuters headline trial ballon, with the last one coming over a month ago and suggesting that the ECB may buy equities at some point in the future. So, maybe to make up for lost time, moments ago Reuters blasted headlines which had a quick but transitory effect on stocks and the Euro with the following:


More from the full piece

The European Central Bank is nearly certain to continue buying bonds beyond its March target and to relax its constraints on the purchases to ensure it finds enough paper to buy, central bank sources have told Reuters.The moves will come in an attempt to bolster what is being heralded as the start of an economic recovery in the euro zone.

ECB policymakers are due to decide in December on the future shape and duration of their 80 billion euros (£71.58 billion) monthly quantitative easing (QE) scheme, based on new growth and inflation forecasts. They did not discuss specific options at last week’s meeting and no policy proposal has been formulated. But sources familiar with the matter said it was all but sure that money printing would continue in some form beyond March, currently the ECB’s earliest end-date. This would be consistent with ECB President Mario Draghi’s guidance last week that the Bank would keep a “very substantial degree of monetary accommodation” and his dismissal of an abrupt end to the bond scheme.

The extension means some of the ECB’s self-imposed constraints on what it can buy will have to be eased as eligible German bonds become harder to find, the sources said. One possible change being considered would see the ECB buying fewer bonds from countries where scarcity is starting to emerge, such as Germany, whose government debt up to five years is often ineligible because it yields less than the deposit rate. This would be a small departure from a rule dictating that sovereign bonds be bought in proportion to the amount of capital each country has paid into the ECB, which depends on the size of its economy.

This Week Eyes on 4 Events

Of the forces driving prices in the week ahead, events appear more important than economic reports.   There are four such events that investors must navigate.  The Bank of Canada and the European Central Bank meet.  The UK High Court will deliver its ruling on the role of Parliament in Brexit.  The rating agency DBRS updates its credit rating for Portugal.
The Bank of Canada is not going to change interest rates.  Still, growth has disappointed, and price pressures appear to be ebbing.  It will take longer than the BoC is currently anticipating to close the output gap.  It may adjust its forecasts accordingly.  In addition, the recent use of macro-prudential policies to address housing market activity eases one of the inhibitions for a rate cut.  The market is currently pricing in about a one in 20 chance of this materializing next year.
The risk may be somewhat greater than that  In part, there seems to be too much made of the trade-off between the fiscal stimulus and monetary easing.  It is so pre-crisis.  This week’s data is likely to show that CPI continues to moderate and, despite the launch of a new low-income family benefits program, retail sales like fell in August, and the risk is on the downside of the median forecast of -0.1%.
It does not appear that the ECB is prepared to announce a decision about whether it will extend its asset purchases after the current soft end date of March 2017, or about how it will address the potential scarcity of particular securities.  Although we thought there was an opportunity to do so last month, it now seems more likely that the ECB will make its decision at the December meeting.

Overnight US Market :Dow closed -46 points.S&P 500 -5 POINTS

U.S. stocks slipped Thursday as traders digested the decision by the European Central Bank to keep interest rates unchanged and looked for fresh catalysts to propel the market higher.

The Nasdaq composite shrank 0,5% from its all-time closing high set in the previous session. TheDow Jones industrial average and the S&P 500 fell 0.3% and 0.2%, respectively.

As expected, the ECB in a statement said it would keep its key deposit rate unchanged at -0.4%, but also said it would continue to buy 80 billion in euros worth of bonds each month until March 2017 or perhaps longer. In a press conference ECB president Mario Draghi did not announce any new stimulus measures as many investors had hoped. Draghi did not extend the duration of its asset-purchase program, dubbed QE, or announce new assets to be purchased.

Central bank support from global bankers is being scrutinized more and more as the intended results of stronger growth and higher inflation have been difficult to attain. At the same time many investors worry that the massive central bank stimulus is distorting markets and inflating asset prices.

Investors are looking for a fresh catalyst to propel stocks higher. Currently the broad S&P 500 is overvalued and U.S. corporate earnings are in a slump, with profit growth contracting four straight quarters, according to Thomson Reuters data.

The lack of new stimulus in the eurozone knocked stocks lower in Germany and France, with main stock indexes there falling 1.4% and 1.3%, respectively. The broad Stoxx Europe 600 index was down 1%.

In currency trading, the euro rose in value vs. the dollar and climbed back above the 1.13 level.

In the bond market, the yield on the 10-year Treasury rose to 1.566%, from 1.541 Wednesday. Yields also rose in Germany and Japan.

Oil prices were on the rise, with U.S.-produced crude rising 1.8% to $46.35 per barrel.

No timeline for Greek inclusion in ECB QE – Draghi

The European Central Bank is not set to take any immediate decision on including Greece in its bond buying programme as it awaits further clarity on the country’s debt sustainability from eurozone governments, Mario Draghi has said.

Following the ECB’s move to allow Greek banks to access the ECB’s cheap loans earlier this year, Mr Draghi said there was no “precise timeline” on the more significant move to include Greek bonds under the ECB’s stimulus measures that began last March.

Writing in response to a question from a Greek MEP, the ECB president said any moves towards inclusion in the programme could not be “specified at the current juncture”.

He noted that finance ministers in the Eurogroup were still considering what measures to take to ensure the country’s debt pile is sustainable. In May, the Eurogroup and IMFagreed on a broad but imprecise set of measures to reduce the country’s debt pile after its current rescue programme ends in 2018.

There are also big questions over the IMF’s participation in any new bailout as the fund will be carrying out its own debt sustainability analysis later this year before deciding whether it will commit any new funds to Greece.

Angela Merkel has a hot date with Mario today

Merkel party lawmakers are pushing her to find out what the ECB’s exit strategy is for QE and low rates.

Various members of her party are voicing concern over the ECB’s current actions and not too far behind on the soap box is Bundesbank head, Jens Weidmann

It’s no surprise that most of the noise against the ECB’s easing policy is coming from Germany but they are part of the Eurozone and so have to suck it up if other members vote for further easing. That said, from the ECB minutes released yesterday, further action might be a hard sale unless things really deteriorate from here

Will Mario be taking Ang for a ride?

Bloomberg has the full story

Tsipras’ Letter To The Troika: Full Text

Follows the full text of a letter Greek PM Tsipras send to the Troika: Commission President Juncker, ECB’s Draghi, and the IMF’s Lagarde regarding the latest Greek deal proposal. 

Dear President and Managing Director, 


The attached proposal for a comprehensive and specific reform agenda by the Minister of Finance of Greece – aimed at complementing the request for a loan facility from the ESM of July 8 2015 – is conveyed to you following the Euro Summit decision of July 7 2015. 

In this context, it will be assessed by the three institutions to be presented to the Euro Group. It constitutes the result of many months of formal and informal negotiations that the Greek government undertook with the institutions at all levels, aiming at reaching a program that will be economically viable and socially just. 

With this proposal, the Greek people and the Greek government, confirm their commitment to, fulfilling reforms that will ensure Greece remains a member of the Eurozone, and ending the economic crisis. The Greek government is committed to fully implementing this reform agenda – starting with immediate actions – as well as to engaging constructively on the basis of this agenda, in the negotiations for the ESM Loan. 

This reform agenda constitutes part of the wider effort of the Greek Government, towards reforming the Greek economy and public administration, through fighting corruption, clientilism and inefficiency, promoting social justice and creating a positive environment for sustainable economic growth. Thanking you for our cooperation, 

Yours sincerely, 


Alexis Tsipras

Central bankers warn of QE threat to market discipline

The German and Dutch central bank presidents, two of the eurozone’s toughest hawks, have warned that monetary easing would allow France, Italy and other economically vulnerable countries to shirk unpopular reforms.

Jens Weidmann of the Bundesbank and Klaas Knot, head of De Nederlandsche Bank, delivered their broadsides just days after Mario Draghi, the European Central Bank chief, launched quantitative easing, a huge €1.1tn bond-buying programme designed to boost flagging economic growth.

“Cheap government financing conditions should not cause governments to believe that further reforms are not needed,” Mr Weidmann said in Frankfurt. “That goes not only for the countries affected by crises but also for big countries like France and Italy.”

He added: “If the member states get used to such financing conditions, it could lead to a lessening of their motivation for further consolidation or reform measures.”

Mr Knot was even more explicit: “For a very long time, there will be no market discipline — or very little market discipline — on governments. This means that budgetary rules have become even more important to safeguard discipline in government budgeting.”