Tag Archives: ECB

U.S. and Eur Data/GDP Downgrades

Posted on by


Karim writes:

U.S. data on the soft side (October)

  • Most notable is core durable goods orders (capex has been gwth leader of late) falling 1.8% and 3mth annual rate slowing to 4% from 7.3%
  • Core shipments (more important for current quarter growth) down 1.1%
  • Personal spending up 0.1%.
  • Personal income up 0.4% (mostly via wages) and savings rate up from 3.3% to 3.5%
  • Headline Price index-0.1% and core unchanged, so reasonable increase in real incomes. Core PCE Index now 1.5% 3mth annualized vs 2% last month

EUR Composite PMI ‘surprises’ to upside in November, rising from 46.5 to 47.2

  • Interesting that manufacturing (more volatile and more of a leading indicator) much weaker than services.
  • Also, German new orders fall 2.6pts to 42.6

Q4 GDP estimates in U.S. being shaved 0.25-0.50% on the data. Current range 2.5-3.25%.
Failure to extend payroll tax cut would have impact almost entirely in Q1 2012 (annual withholding ceilings typically reached early in the year)-about 1% on GDP.

European estimates are about -1.5% annualized for both Q4 and Q1. Germany among the weakest (due to manufacturing) with estimates in the -2.5% area.

PMI data in Europe has had a very good track record signaling ECB policy rate changes. This data pretty much cements another rate cut next month.

Share

Talk still cheap – ECB writes the check again

Posted on by

Lots of talk, particularly from Germany about the ECB not writing the check, due to (errant) inflation concerns.

But to no avail. In fact, with the Rubicon crossing decision to haircut Greek bonds 50% for the private sector’s holdings, expect the check writing to continue to intensify.

And expect economies to continue to slow under the pressure of continuing austerity demands that also work to make their deficits higher.

From today’s headlines:

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen
A Successor, Picked by a Tainted Hand
EU Lowers Euro-Region Growth Forecasts
Italy’s Senate Speeds Austerity Vote
Merkel’s Party May Adopt Euro-Exit Clause in Platform, CDU’s Barthle Says
Greek President to Meet Party Leaders as Unity Aim in Disarray

Italian Bonds Advance as ECB Purchases Debt; French, Belgian Spreads Widen

By Paul Dobson

November 10 (Bloomberg) — Italian government bonds rose as the European Central Bank was said to purchase the securities and after the nation sold the maximum amount of one-year bills on offer at an auction.

The advance pushed the yield on 10-year securities below 7 percent. Italy’s senate is set to vote tomorrow on a package of austerity measures designed to clear the way for establishing a new government and restore confidence in Europe’s second-biggest debtor. The nation sold 5 billion euros ($6.8 billion) of bills at an average yield of 6.087 percent, up from 3.570 percent on similar-maturity securities sold last month.

“Together with reported ECB buying, this auction result should support further Italy outperformance,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate and Investment Bank in London.

The yield on two-year Italian government notes slid 55 basis points to 6.66 percent at 9:43 a.m. London time. The 2.25 percent securities due November 2013 rose 0.915, or 9.15 euros per 1,000-euro face amount, to 92.205.

The ECB bought Italian government bonds, according to five people familiar with the transactions, who declined to be identified because the deals are confidential. It also bought Spanish securities, two of the people added. The ECB was not immediately available for comment when contacted by telephone.

Share

German “wise men” (classic oxymoron) warn ECB is risking credibility

Posted on by

German “wise men” warn ECB is risking credibility

By Alexandra Hudson

November 9 (Reuters) — Germany’s “wise men” panel of economic advisers warned the European Central Bank it risks losing credibility by buying the bonds of heavily-indebted euro zone states, and that monetary and fiscal policy are becoming worryingly blurred.

The group, which advises the German government, said in a report published on Wednesday: “The bond buying program dismantles market discipline without establishing any political discipline in its place.”

What about the Stability and Growth Pact? And what other choice do they offer?

In blurring monetary and fiscal policy, the report said, “the ECB is jeopardizing its credibility, because it is falling under the suspicion of monetizing sovereign indebtedness.”

Meaningless in the context of fiat currency and floating fx policy.

Germany strongly objects to the bond-buying strategy but the ECB’s new president Mario Draghi has signaled the bank is ready to carry on buying bonds of troubled euro zone governments.

The wise men said they expected the bank to make a further cut in the key euro zone interest rate to 1 percent by the end of 2011, and that rates would remain at this level throughout 2012.

The silver bullet!

In the report, the panel suggested a different method for increasing the euro zone’s capacity to prevent contagion from the debt crisis, should the 440 billion-euro European Financial Stability Facility (EFSF) not suffice.

In what the “wise men” said would be a departure from current models of securing debt with ever more borrowing, they advised setting up a “European Redemption Pact.”

This would involve countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability. They would commit to reforms and see their debts repaid over 20-25 years.

Within a few years the redemption fund could have a volume of 2.3 trillion euros worth of bonds, the study said.

Back to standing in a bucket and picking yourself up by the handle.

Germany, the euro zone’s largest economy and growth engine of the last two years, is expected to see economic expansion stutter in coming quarters as the euro zone debt crisis saps business and consumer confidence and export markets shrink.

Including exports to the other euro members as their economies continue to slow as well.

The “wise men” forecast economic growth of 0.9 percent in 2012, slightly below the 1.0 percent forecast by the government, which last month almost halved its estimate from a previous 1.8 percent.

Growth this year was seen at a healthy 3 percent.

Thanks to ECB supported funding for Greece and the others used to buy German goods and services.

Share

News recap comments

Posted on by

The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side –

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side –

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.

Share

President Obama entering the fray

Posted on by

More of the blind leading the blind. The one thing they all agree on, at great expense to global well being, is the budget deficits are all too large and the need for shared sacrifice and all that.

No chance for anything constructive to come out of any of this.

And these masters of their money machines don’t even know how to inflate, as they all desperately try to inflate with their versions of quantitative easing, which, functionally, is just another demand draining tax.

*DJ Merkel, Obama Discussed How To Boost EFSF Firepower Without ECB
*DJ Obama To Merkel: We Are Totally Invested In Your Success – Source
*DJ Geithner, Schaeuble May Meet To Discuss IMF Role In Euro Crisis -Source

Share

The Euro Zone Race to the Bottom

Posted on by

While the symptoms get continuous attention as they get threatening enough, the underlying cause-the austerity- does not.

The euro zone, like most of the world, is failing to meet its further economic objectives because of a lack of aggregate demand.

And in the euro zone, the fundamental problem is that the member nations, as credit sensitive ‘currency users’ are necessarily pro cyclical in a downturn, much like the US states, and therefore incapable of independently meeting their further economic objectives.

So even as the euro zone struggles to address it’s solvency crisis that threatens the union itself as well as at least part of what remains of the global financial architecture, the underlying shortage of euro net financial assets continues to undermine output and employment, with GDP growth now forecast to fall to 0 with a chance of going negative in the current quarter.

What this means is that without adopting an alternative to the current policy of applying enhanced austerity as the means of addressing the solvency issue, it all remains in a very ugly downward spiral with social collapse far less than impossible.

So yes, the solvency issue can continue to be managed by the ECB, the issuer of the euro, continuing to buy national government debt as needed. But that doesn’t add net euro financial assets to the economy. It merely shifts financial assets held by the economy from the debt of the national governments to deposits at the ECB. So it does nothing with regards to output, employment, inflation, etc. as recent history has shown.

In fact, nothing the world’s central banks do adds net financial assets to their economies. And much of what they do actually removes net financial assets from their economies, making things worse. Note that last year the Fed turned over some $79 billion in profits to the Treasury. Those profits came from the economy, having been removed from the economy by the Fed’s policy of quantitative easing, which the old text books rightly used to call a tax.

And meanwhile, the imposed austerity that accompanies the bond purchases does directly alter output and employment- for the worse.

Additionally, for all practical purposes, there is universal global support for austerity as the means supporting global output and employment.

So even if the euro zone gets the solvency issue right, with the ECB writing the check to remove all funding constraints, the ongoing austerity will continue to depress the real economies.

Share

Early Holiday Cheer…

Posted on by

As discussed last week, the latest euro package just announced is unravelling quickly as markets again realize there is no actual substance, and no operational path with regards to carrying any of it out. So things will deteriorate as described until markets again force further ‘action.’

At the same time, the austerity continues to weaken the euro economies, with Q4 potentially going negative, driving deficits that much higher in the process.

The ‘answer’ remains the ECB writing the check, which they’ve sort of seemed to recognize, but they remain (errantly) concerned that reliance on the ECB is inherently inflationary, and thereby violates the ECB’s mandate for price stability. So it won’t happen until things again get bad enough to force it to happen.

The catastrophic risk remains a failure, when push comes to shove, to allow the ECB to write the check as they have been doing to allow it all to muddle through.

The range of outcomes couldn’t be wider. Write the check and not much happens, don’t write the check and there is unthinkable collapse.

Meanwhile, the 1% running the US looks to be trying to take the lead in the global austerity race to the bottom as the Democrats in the super committee on deficit reduction have led off by proposing a $4 trillion deficit reduction package.

Toss in West Texas crude prices heading to Brent levels of about $110/barrel as the strategic petroleum reserve release winds down over the next three weeks and the looks to me like the US consumer crawls back into his foxhole just in time for the holiday season.

Not to mention Japan now darning the torpedoes and buying dollars to take back a bit of the export market they lost by kowtowing to former tsy sec paulson’s demands to not be a ‘currency manipulator’ in the context of still weakening global demand in general.

The number one threat to world order remains a failure to sustain demand. The good news is sustaining aggregate demand is a simple matter once the monetary system is understood. The bad news is there seems to be no one of authority who doesn’t have it all backwards.

Share

Euro Bailout Fund Chief Sees No Quick China Deal

Posted on by

Now it all starts unraveling. It’s all talk- another ‘optical illusion’ with no operational reality I sight. The China participation isn’t a done deal. The 50% haircut isn’t a done deal either as they haven’t yet figured out how to actually do it without a default event. The EFSF contributions aren’t a done deal either.

What they have done is further frightened investors to the point where the ECB will find itself buying a lot more bonds to keep member nation funding in check, while ‘negotiations’ drag on with no resolution, meaning, as previously discussed, this is the resolution.

Hoping i’m wrong…

Euro Bailout Fund Chief Sees No Quick China Deal

By Reuters

October 28 (CNBC) — The head of Europe’s bailout fund said on Friday he does not expect to reach a conclusive deal with Chinese leaders during a visit to Beijing but expects the surplus-rich country to continue buying bonds issued by the fund.

Share