3/10/20: Eurocoin Leading Growth Indicator 3Q 2020

 

Eurocoin, a leading growth indicator for the euro area published by CEPR and Banca d'Italia posted another negative (recessionary) reading in September (-0.31) after marking peak growth contraction of COVID19 pandemic period in August (-0.64). This puts Eurocoin in negative territory for the 6th consecutive month since March 2020. 

Current forecast for 3Q 2020 growth remains at -3.5 percent q/q. Deflationary pressures are also building up. Euro area's 12 months average HICP forecast for 3Q 2020 stands at around 0.6 to 0.5.

As the chart above shows, Eurozone remains deeply in a recessionary territory based on Eurocoin forecasts and inflation dynamics. Longer term growth averages are shown in the chart below:

Overall, as noted above, one must take all leading indicators and forecasts with some serious warnings attached: we are in an environment where past models for forecasting economic aggregates become severely challenged.

17/9/20: Eurocoin Leading Growth Indicator 3Q 2020

 

Eurocoin, CEPR & Banca d'Italia leading growth indicator for Euro Area economy is pointing to renewed weaknesses in the Eurozone economy in August, falling to its lowest levels in the COVID19 pandemic period:

As the chart above shows, Eurocoin fell from -0.5 in July to -0.64 in August, its lowest reading since June 2009. The forecast September indicator is at -0.30. Through August, we now have five consecutive months of sub-zero readings. Based on July-August data and September forecast, we are looking at a GDP contraction of 3.5 percentage points in 3Q 2020. This is mapped out in the chart below:

As the chart above shows, average annual growth rate in the Eurozone for 2020 is now sitting at -6,33 percent, far worse than the previous low of -0.575 in 2009. In quarterly readings, we now have two actual and one forecast quarters of 2020 all performing worse than the peak of the Global Financial Crisis / Great Recession contraction (see green entry in the chart above).

As before the COVID19 crisis, Eeurozone economy is performing woefully. On no time horizon did Euro area manage to achieve average annual growth of 2% (chart above).

4/7/20: ifo Institute Eurozone Growth Outlook

Germany's ifo Institute issued a new growth outlook for Eurozone economy:

• "Overall, the eurozone economy is likely to see a sharp recession in the first half of 2020. 
• "GDP already contracted in Q1 by 3.6%. 
• "In Q2, the decline of GDP is forecast to be historic (-12.3%). 
• "On the other hand, the recovery is likely to be quick supported by massive stimuli in some eurozone countries with GDP growth reaching +8.3% in Q3 and +2.8% in Q4 2020. 
• "Yet, the GDP level at the end of last year will not be reached by the end of this year."

In 1Q 2020:

• GDP fell by 3.6%. 
• "The greatest negative contribution came from private consumption. 
• "... firms hold back their investments due to liquidity issues and uncertainty on future developments. 
• "... external demand was weak and caused exports to plunge. 
• "Economic activity went down by 5.3% (Italy), 5.3% (France) and 5.2% (Spain). Germany was affected less severely with GDP contracting by 2.2%. 

Dynamics into June:

• "The European Commission’s economic sentiment indicator fell from 94 points in March further to 65 points in April, rebounded somewhat in May and increased strongly in June up to almost 76 points."
• "The IHS Markit composite purchasing manager’s index reflects a similar development as it dropped from 30 points in March to as low as 14 points in April. In May it recovered to 32 and in June again up to 48 points." Note: Markit PMIs below 50 indicate continued, compounded contraction, as a rise in index from 32 to 48 between May and June means that contraction was weaker in June.

Summary of forecasts:

Headwinds to the above forecast:

• "Currently, economic projections are made in face of high epidemiological uncertainty. ... This forecast assumes that a second COVID-19 wave will be prevented. The occurrence of a second wave, with containment measures to being introduced again, is thus a downward risk for our forecast. 
• "Another uncertainty for this forecast is that we are still learning about consumer reactions to containment measures and it is still unclear, how quickly consumption behavior will normalize.
• "In addition, the liquidity situation of many companies is deteriorating rapidly. An unexpectedly high number of insolvencies might disturb the economic recovery and cause bigger than expected problems for the banking sector. Currently, in many countries new regulations for postponing insolvencies were introduced, which means that these will become evident later than usual, probably not before autumn. 
• "Also, numerous private households might run into solvency issues due to lower income and a worsening labour market situation."

In contrast, here are the IMF latest forecasts for the euro area:

Eurocoin leading growth indicator: https://trueeconomics.blogspot.com/2020/06/29620-eurocoin-growth-indicator-june.html.

Markit PMIs:

3/7/20: ECB Jumping the Proverbial Shark?

ECB's money-printing press has been running overtime these weeks. So let's put the Euro area central banks' monetary policy shenanigans into perspective, comparing them to the Global Financial Crisis (GFC) related measures, the Euro area sovereign debt crisis and the subsequent painful recovery:

Good thing: ECB has deployed COVID19 response at scale and fast. Bad thing: it is highly uncertain how much growth all of this activism is going to sustain. From 2000 through 1Q 2020, there is zero (statistically) relationship between current GDP growth (nominal) and ECB assets accumulation in the same year and in prior year:

Even ignoring statistical significance, the relationship itself is not positive, especially in the lagged data. In other words, there is absolutely no evidence of causality from ECB asset purchases to higher economic growth. While reasons for this results are complex (and not really a matter for this post), there are some serious questions to be asked as to how much tangible growth is being sustained by the Central Bank's activism. On the other side of the same argument, if we assume that the ECB purchases of assets are effective at sustaining growth in the Euro area economy, then we must have some serious questions as to what the Euro area economy is capable of producing in terms of GDP growth without such interventions.

In simple terms: we are damned if we do, and damned if we do not:

• Either monetary activism is not effective at sustaining growth, or
• If monetary activism is effective, then the state of the economic institutions overall is so dire, it remains comatose even with extraordinary supports from Frankfurt.

Neither is a pleasant conclusion. And there is not a third alternative.

Just in case you need a reality check on how poor Euro area's growth has been, here is a summary:

12/6/20: Summary of the Eurosystem Response Measures to COVID19

Great and tight summary of the Eurosystem monetary policies deployed in response to COVID19 pandemic: https://blocnotesdeleco.banque-france.fr/en/blog-entry/monetary-policy-measures-taken-eurosystem-response-covid-19.  Cumulative total through the end of May, EUR 1.27 trillion.

19/5/20: German Hawks vs ECB Doves?

My article for The Currency on the German Constitutional Court ruling regarding ECB's PSPP program: https://www.thecurrency.news/articles/17028/german-courts-are-fighting-with-the-ecb-what-does-it-mean-for-ireland.

10/12/19: Irish Banks: Part 2

Continuing with the coverage of the Irish banks, in the second article for The Currency, available here: https://www.thecurrency.news/articles/4810/a-catalyst-for-underperformance-how-systemic-risk-and-strategic-failures-are-eroding-the-performance-of-the-irish-banks, I cover the assets side of the banks' balancesheets.

The article argues that "The banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what does not make sense to investors does not make sense to society at large." In other words, strategic errors that have been forced onto the banks by deleveraging post-crisis have resulted in the Irish banks becoming a de facto peripheral play within the Euro area financial system, making them unattractive - from growth potential - to international markets.

The key conclusions are: "From investors’ perspective, neither of these parts of the Irish lenders’ story makes much sense as a long term investment proposition. From the Irish economy’s point of view, the banks are failing to provide sufficient support for the demand for investment funding, and are effectively removed from financing corporate investment. In this case, what doesn’t make sense to investors doesn’t make sense to the society at large."

10/12/19: Irish Banks: Part 1

Returning back to the blog after a break, some updates on recent published work.

In the first article on Irish banking for The Currency, titled "Culture wars and poor financial performance: examining Ireland’s dysfunctional, beleaguered banking system", I argued that "The financial performance of the Irish banks has been abysmal. Not for the lack of profit margins, but due to strategic decisions to withdraw from lending in the potential growth segments of the domestic and European economies." The article shows the funding side of the Irish banks and the explicit subsidy they receive from the ECB through monetary easing policies - a subsidy not passed to the end credit users.

In simple terms, high profit margins are underpinned - in Irish banks case - by low cost of funding.

Conclusions: "The implications of the lower cost of banks equity, interbank loans, as well as deposits for the Irish banking sector are clear cut: since the start of the economic recovery, Irish banks have enjoyed an effectively free ride through the funding markets courtesy of the ECB and the blind eye of the Irish consumer protection regulators. Yet, despite sky-high profit margins extracted by the banks from the households and businesses, the Irish banking sector remains the weakest link in the entire Eurozone’s financial services sector, save for Greece and Cyprus. If the funding side of the equation is not the culprit for this woeful record of recovery, the other two sides of the banking business, namely assets and regulatory costs, must be."

Read the full article here: https://www.thecurrency.news/articles/3833/culture-wars-and-poor-financial-performance-just-what-is-going-on-within-irelands-beleaguered-banks. 

29/9/19: Divided ECB

Divided they stand...

Source: https://www.bloomberg.com/news/articles/2019-09-29/lagarde-inherits-ecb-tinged-by-bitterness-of-draghi-stimulus

The ECB is more divided than ever on the 'new' direction of QE policies announced earlier this month, as its severely restricted 'political mandate' comes hard against the reality of VUCA environment the euro area is facing, with:

1.  Reduced forward growth forecasts (net positive uncertainty factor for QE)
2. Anaemic inflation expectations (net positive risk factor for QE), but reduced expectations as to the effectiveness of the QE measures in their ability to lift these expectations (net negative uncertainty factor)
3. Low unemployment and long duration of the current recovery period (net negative uncertainty factor for QE)
4. Relative strength of the euro, as per chart below, going into QE (net positive risk factor for QE)
5. Related to (5), deteriorating global growth and trade outlooks, with the euro area being a beneficiary of the Trump Trade Wars so far (ambiguous support for QE)
6. Expectations concerning the Fed, Bank of Japan, Bank of England etc policy directions (a complexity factor in favour of QE), and
7. Expectations concerning the potential impact of Brexit on euro area economy (another complexity factor supporting QE).

Here is a chart showing exchange rate evolution for the euro area, and key QE programs timings (higher values denote stronger euro):

Meanwhile, for the measures of monetary policy effectiveness (lack thereof) see upcoming analysis of the forward forecasts for euro area growth on this blog in relation to Eurocoin data.

10/8/19: Irish Debt Sustainability Miracle(s): ECB and MNCs

As a part of yesterday's discussion about the successes of Irish economic policies since the end of the Eurozone crisis, I posted on Twitter a chart showing two pivotal years in the context of changing fortunes of Irish Government debt sustainability. Here is the chart:

The blue line is the difference between the general Government deficit and the primary Government deficit, which captures net cost of carrying Government debt, in percentages of GDP. In simple terms, ECB QE that started in 2015 has triggered a massive repricing of Eurozone and Irish government bond yields. In 2012-2014 debt costs remained the same through 2015-2019 period, Irish Government spending on debt servicing would have been in the region of EUR 49.98 billion in constant euros over that period. As it stands, thanks to the ECB, this figure is down to EUR 27.94 billion, a saving of some EUR 4.41 billion annually.

Prior to 2015, another key moment in the Irish fiscal sustainability recovery history has been 2014 massive jump in real GDP growth. Over 2010-2013, the economic recovery in Ireland was generating GDP growth of (on average) just 1.772 percent per annum. In 2014, Irish real GDP growth shot up to 8.75 percent and since the start of 2014, growth averaged 6.364 percent per annum even if we are to exclude from the average calculation the bizarre 25 percent growth recorded in 2015. Of course, as I wrote on numerous occasions before, the vast majority of this growth between 2014 and 2019 is accounted for by the tax-optimisation transfer pricing and assets redomiciling by the multinational corporations - activities that have little to do with the real Irish economy.

16/7/19: Corporate Yields are Heading South in the Euro Land

Some of the euro area's junk-rated corporate debt is now trading at negative yields, and over 15% of near-junk debt is also charging the lenders to provide cash to financially weaker companies:

Source: WSJ

While the overall stock of negative yielding debt (sovereign and corporate) is now nearing $13.5 trillion worldwide:

Source: Bloomberg

All in 51 percent of all European Government bonds are trading at negative yields, and just over 30 percent of all investment grade corporate bond issued in Euro.

The percentage of negative yielding debt amongst junk-rated corporates is small. Bank of America ML estimated that the percentage of BB-rated European corporate bonds with negative yield rose from 0.225% at the end of May to 1.5% at the end of June. Back then, 14 companies had junk-rated bonds rated BB or lower with negative yields, with total market value of $3 billion.

The chart below plots corporate junk-rated bond yields index for the euro issuers:

Meanwhile, Greek Government bonds auction this week went into a massive demand overdrive. Greece sold more than EUR13 billion worth of 7-year bonds, almost EUR11 billion more than it planned originally, at the yields of 1.9 percent, or 2.4 percentage points above the Eurozone benchmark average. The spread to Eurozone benchmark has now fallen from 3.73 percent in March sale. In fact, U.S. 7 year bonds are selling at a yield of 1.97 percent, implying lower yields for Greek debt than the U.S. debt.

Here is the chart plotting Euro area sovereign yield curves for AAA-rated and for all bonds:

The yields on AAA-rated debt are negative out to 13 years maturity, and for all bonds to 8 years maturity. 

29/6/19: Why Moody’s is wrong to keep Cyprus on junk status

Euromoney on Cypriot economy: "Why Moody’s is wrong to keep Cyprus on junk status" https://www.euromoney.com/article/b1g125jl1wvf0v/why-moodys-is-wrong-to-keep-cyprus-on-junk-status with a comment from myself.

24/6/19: Markets Expect the Next QE Soon...

Adding to the previous post on the negative yielding debt, here is a recent post from @TracyAlloway showing Goldman Sachs' chart on implied probability of the U.S. Fed rate cuts over the next 12 months:

Source of chart: https://twitter.com/tracyalloway/status/1141895516801732608/photo/1.

The rate of increases in the probability of at least 1 rate cut is staggering (as annotated by me in the chart). These dynamics directly relate to falling sovereign debt yields (and associated declines in corporate debt yields) covered here: https://trueeconomics.blogspot.com/2019/06/24619-negative-yielding-debt-monetary.html.

Notably, as the markets are now 90% convinced a new QE is coming, their conviction about the scale of the new QE (expectations as to > 3 cuts) is off the chart and rising faster in 2Q 2019 than in the previous quarters.

24/6/19: Negative Yielding Debt: Monetary Contagion Spreads

Negative yielding Government debt (the case where investors pay the sovereign lenders for the privilege of lending them funds) has hit all-time record (based on Bloomberg database) last week, at 13 trillion.

Source of charts: https://www.bloomberg.com/amp/news/articles/2019-06-21/the-world-now-has-13-trillion-of-debt-with-below-zero-yields.

Quarter of all investment grade corporate debt is now also yielding negative payouts (note: bond returns include capital gains, so as yields fall, capital gains rise for those investors who do not hold bonds out to maturity).

In effect, negative yields are a form of a financialized tax: investors are paying a premium for risk management that the bonds provide, including the risk of future decreases in interest rates and the risk of declining value of cash due to expected future money supply increases. In other words, a eleven years after the Global Financial Crisis, the macro-experiment of monetary policies 'innovations' under the QE has been a failure: negative yields resurgence simply prices in the fact that inflationary expectations, growth expectations and financial stability expectations have all tanked, despite a gargantuan injection of funds into the financial markets and financial economies since 2008.

In 2007, total assets held by Bank of Japan, ECB and the U.S. Fed amounted to roughly $3.2 trillion. These peaked at just around $14.5 trillion in early 2018 and are currently running at $14.3 trillion as of May 2019. Counting in China's PBOC, 2008 stock of assets held by the Big 4 Central Banks amounted to $6.1 trillion. As of May 2019, this number was $19.5 trillion. Global GDP is forecast to reach $87.265 trillion by the end of this year in the latest IMF WEO update, which means that the Big-4 Central Banks currently hold assets amounting to 22.35% of the global nominal GDP.

Negative yields, and ultra-low yields on Government debt in general imply lack of incentives for Governments to efficiently allocate public spending and investment funds. This, in turn, implies lack of incentives to properly plan the use of scarce resources, such as factors of production. Given that one year investment commitments by the public sector usually involve creation of permanent or long-term subsequent and related commitments, unwinding today's excesses will be extremely painful economically, and virtually impossible politically. So while negative yields on Government debt make such projects financing feasible in the current economic environment, any exogenous or endogenous shocks to the economy in the future will be associated with these today's commitments becoming economic, social and political destabilization factors in the future.

12/6/19: All's Well in the Euro Paradise

All is well in the Euro [economy] Paradise...

Via @FT, Germany's latest 10 year bunds auction got off a great start as "the country auctioned 10-year Bunds at a yield of minus 0.24 per cent, according to Germany’s finance agency. The yield was well below the minus 0.07 per cent at the previous 10-year auction in late May. The previous trough of minus 0.11 per cent was recorded in 2016. Notably, demand in Wednesday’s auction was the weakest since late January, with investors placing bids for 1.6-times more than the €22bn that was issued."

Because while the "Euro is forever", economic growth (and the possibility of monetary normalisation) is for never... 

14/5/19: Monetary Policy at the edge of QE

My new column for the Cayman Financial Review on the current twists in global Monetary Policies is now available on line: https://www.caymanfinancialreview.com/2019/05/07/monetary-policy-at-the-edge-of-qe/.

17/1/19: Eurocoin December 2018 Reading Indicates a Structural Problem in the Euro Area Economy

December 2018 reading for Eurocoin, a lead growth indicator for euro area posted a second consecutive monthly decline, falling from 0.47 in November to 0.42 in December. December reading now puts Eurocoin at its lowest levels since October 2016.

Charts below show dynamics of Eurocoin, set against actual and forecast growth rates in the euro area GDP and  inflation:

Per last chart above, the pick up in inflation, measured by the ECB’s target rate of HICP, from 1.4% at the end of 3Q 2017 to 1.7% in 3Q 2018 has been associated with decreasing growth momentum (Eurocoin falling from 0.67 q/q to 0.48, and growth falling from the recorded 0.7% q/q in 3Q 2017 to 0.2% q/q in 3Q 2018).

With this significant downward pressure on growth happening even before any material monetary tightening by the ECB, Which suggests that euro area growth problem is structural, rather than policy-induced. While QE did boost growth from the crisis period-lows, it failed to provide a sustainable momentum for significantly expanding potential growth. Thus, even a gradual slowdown in monetary easing has been associated with a combination of subdued, but accelerating inflation and falling growth.

10/1/19: QE or QT? Look at the markets for signals

With U.S. Fed entering the stage where the markets expectations for a pause in monetary tightening is running against the Fed statements on the matter, and the ambiguity of the Fed's forward guidance runs against the contradictory claims from the individual Fed policymakers, the real signals as to the Fed's actual decisions factors can be found in the historical data.

Here is the history of the monetary easing by the Fed, the ECB, the Bank of England and the BOJ since the start of the Global Financial Crisis in two charts:

Chart 1: looking at the timeline of various QE programs against the Fed's balancesheet and the St. Louis Fed Financial Stress Index:

There is a strong correlation between adverse changes in the financial stress index and the subsequent launches of new QE programs, globally.

Chart 2: looking at the timeline for QE programs and the evolution of S&P 500 index:

Once again, financial markets conditions strongly determine monetary authorities' responses.

Which brings us to the latest episode of increases in the financial stress, since the end of 3Q 2018 and the questions as to whether the Fed is nearing the point of inflection on its Quantitative Tightening  (QT) policy.

27/12/18: Mr. Draghi's Santa: Ending QE, Frankfurt Style

It's Christmas time, and - Merry / Happy Christmas to all reading the blog - Mr. Draghi is intent on delivering a handful of new presents for the kids. Ho-Ho-Ho... folks:

The ECB balancesheet has just hit a new high of 42% of Eurozone GDP, up from 39.7% at the end of 3Q 2018. Although the ECB has announced its termination of new purchases of assets under the QE, starting in January 2019, the bank has continued buying assets in December, and it will continue replacing maturing debt it holds into some years to come.

Despite the decline in the Euro value, expressed in dollar terms, ECB's balancesheet is the largest of the G3 Central Banks, ahead of both the Fed and the BOJ.

Ho-Ho-Ho... folks. The party is still going on, although the guests are too drunk to walk. Meanwhile, global liquidity has been stagnant on-trend since the start of 2015.

And now the white powder of debt is no longer sufficient to prop up the punters off the dance floor:

Ho-Ho-Ho... folks.

9/9/18: The end of the clam before the storm

My article on the shifting landscape for monetary policies: U.S. and Euro area for Sunday Business Post https://www.businesspost.ie/business/end-calm-storm-424321