The ECB is in a tight spot with the Fed hiking and tapering. The ECB would like to hike, but data in the Eurozone, especially Germany has been weak. And before it will hik it at least needs to end its asset purchasing program.
Today the ECB played it half way. It announced an end to asset buying in December but it simultaneously pledged to hold rates low for longer than the market expected.
As a result, the Euro slid 1%, On Track for Steepest Slump Since October.
ECB to End Bond-Buying Program in December
The Wall Street Journal reports ECB to End Bond-Buying Program in December as Crisis-Era Policies Wind Down.
The European Central Bank is closing a chapter on one controversial policy, government bond purchases, while extending the life of another: negative interest rates.
The central bank Thursday laid out plans to wind down its giant bond-buying program by the end of this year, but said it likely would wait “at least through the summer of 2019” before raising its deposit rate, now at minus 0.4%.
The ECB “has done everything it can to prevent investors from pricing in rising interest rates,” said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. “There is no sign of a real rate hike cycle.”
Critics argue the ECB’s purchases coincided with steep increases in the prices of property and other assets and made it easier for unviable “zombie” firms to stay alive. Some countries, notably Greece and Italy, still have large volumes of nonperforming loans.>
Negative interest rates tend to hurt savers and banks, but Mr. Draghi argued Thursday that savers could invest in other assets while profits at bank and insurance companies hadn’t been hurt.
ECB vs Fed
ECB Asset Purchases
Negative Interest Rates Hurt Banks
Negative interest rates clobber savers and hurt the banks. The US recapitalized banks by giving them free money.
For further discussion, please see Free Money Calculation: Fed Will Give $36.93 Billion of Taxpayer Money to Banks.
Bubbles Galore
The Fed and the ECB’s policy have two things in common.
- Both sets of actions blew bubbles.
- Both sets of actions created zombie corporations.
Today’s Interesting Treasury Reaction
Today’s excellent retail sales report in the US should have sent US treasury yields higher. Instead bond yields fell.
For discussion, please see Spending Like Crazy: Retail Sales Jump but Bond Yields Lower
Purportedly, this action is due to the ECB’s announcement. I am not so sure.
News Related Reaction?
It’s easy to assign a reaction to the news.
But the bond market could just as easily be reacting to something else, like yesterday’s news: Fed Hikes Again, Modifies Accommodation Language, Plans on 2 More Hikes in 2018
The long bond can also be looking ahead.
Break Theory
The US yield curve keeps getting flatter and flatter.
The consensus is the Fed will keep hiking “until it breaks something”. The consensus is wrong.
The Fed’s and ECB’s balance sheets and all the bubbles are proof enough things are already broken beyond repair.
— Mike “Mish” Shedlock (@MishGEA) June 14, 2018
No Decoupling
The other common wisdom of the day is the US will decouple from the global markets.
This is the reverse of the 2007 decoupling theory that stated China would decouple from the US economy.
The decoupling theory was wrong then, and it’s wrong now. The US is not immune to a slowdown in Europe and China. And it is not immune to an emerging market collapse in general.
We are in a very late-stage position here.
The Fed is nearly done hiking.
The bursting of asset bubbles will be a very “deflationary” thing. I suspect the long bond senses that.
Mike “Mish” Shedlock
Japan has been “managing,” by decreasing population in lockstep with activity. Along with starting out from a position that makes current day Germany look like a productivity basket case. The former is tough to pull off, unless you are an island at a far corner of the world. The latter unless you are at the very top of the world.
Short of systematically shelling million-sized inbound crowds Bonaparte style, in the process turning their beaches as blood red as an Icelandic fjord during whaling season, Europe don’t have the practical option of a Japan style immigration policy. People will just show up at their borders anyway. Just wait until Erdogan, and whomever attempts to come behind him, looses what fragile control government/the military still have over Turkey, and that place turns into a Syria of infighting….. Or perhaps the Mullahs lose control in Iran…. Or the Saudi regime starts having hickups…. Or, leaving the ME aside, some enterprising soul finds a way from Africa’s war torn interior, to refugee boat pickups on the Mediteranean… And then phones home a picture of a paystub once in Europe……. Japan never faced any of this, being surrounded by either one-child-policy China, literally-in-chains North Korea, drink-yourself-infertile Russia, or booming-economy-with-plenty-of-opportunities emerging Asia.
Japan managed, it’s reasonably homogeneous and a single entity. How do you keep such a diverse group as the EU from infighting as deflation grinds on and on for year after year without even a shared language or single fiscal authority. I also wonder what is the lower bound for the Euro at which exports don’t respond people notice the inflation and the ECB is squeezed into a rate rise response against its will.
like the Fed ,ECB will pretend (play make believe) to end asset purchases while covertly continuing to print trillions and buyin everything within sight and hearing (until they can’t)
What role are total EU demographics playing in this?
It might just be a losing battle no matter what.
Now, add in an export downturn on global retrenchment. Does anyone see any way out of special measures because I don’t. It could be many years, like Japan.
Incredible carnage in Emerging F/X today and also in the Euro.
Have said many times that the Fed ALWAYS tightens until something breaks.
Today’s action at the longer end (10-30yr) of the US Treasury curve says “something broke”.
Here’s my twopence worth:
The pre-commitment to taper and end purchases makes no sense in the context of their projections or the current Eurozone economic situation. A forecast of 1.7% inflation in the future, with the spot data deteriorating, and the problems of asymmetry at the zero bound … it just makes no sense. No there was something else going on today in my opinion.
Maybe Draghi faced total revolt over Italy today. Perhaps all northerners and fiscally hawkish governors revolted and got him to end the purchases. It wouldn’t be too long before they run out of bonds to buy anyway; we all know what’s going on in Italy; and the good data at the turn of the year (now deteriorating) gave them the most plausible excuse they could think of.
Note the conclusion in the background is that the bond purchases didn’t work.
Draghi knows the econ isnt’ ready for this removal of accommodation so he doved it up big time at the Q&A, talking the rate profile lower, because he knows the base rate is now the only policy tool they have got.