What the Danish negative rate experience tells us

Back in July, 2012 the Danish central bank, Nationalbanken, lowered the deposit rate to -0.2 per cent. Back then we wrote that it was going to be costly for the banks, and that money market rates were going deeper into negative territory. With Draghi’s comments last week, how did that whole negative deposit rate action turn out for Denmark?

Nordea had a note out last week on that very subject. Now, before we move, let’s remember that Danish monetary policy is tailored around the FX peg. The deposit rate was there to assure outflow because of mounting pressure on the EUR/DKK pair. Read more

A floor with a few holes

The great debate over interest on excess reserves (IOER), base money and short term debt used ‘the floor’ analogy to describe what happens to short term interest rates. But that might not have been quite the right analogy, at least in the US case.

Izzy has already covered Manmohan Singh’s excellent paper and presentation. In it he raises a few points in regard to the supposed floor that IOER sets for rates, and it is worth exploring it a bit more. Read more

Forget about economics

It’s all political at this point.

The goal going forward is to bring Europe into a state of sustainability. Only politicians can do that. So writes Nomura analyst Jens Nordvig. Read more

Further reading

Elsewhere on Friday,

- Answers to five easy euro questionsRead more

Koo on German bubbles

Ancestors of the eurozone crisis, with Richard Koo – from the Nomura economist’s latest note (our emphasis):

In 2005, I told a senior ECB official that it was unfair to force other countries to rescue Germany by boosting their economies with loose monetary policy without requiring Germany to administer fiscal stimulus, when it was Germany that had become so deeply overextended in the bubble. The official responded that that is what a unified currency means: because Germany could not be granted an exception on fiscal stimulus, the only option was to lift the entire region with monetary policy. Read more

China manufacturing PMIs

HSBC/Markit ‘flash’ PMIs were out this morning. The picture is not pretty. From the FT:

HSBC said its Chinese purchasing managers’ index was on track to fall to 48.1 in June from 48.4 in May, which would mark a seven-month low. In dipping further below the 50 threshold, the flash figure, which is the earliest piece of monthly economic data for China, indicates a steepening contraction of factory activity. Read more

Further reading

Elsewhere on Thursday,

Headline PMI fell from 48.4 in May to 48.1 in June’s initial estimate. Read more

Cheat sheet for Europe

What can Europe do? SocGen has a handy little chart:

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Bank of England turning dovish

The minutes from the latest MPC meeting are out, and it seems the doves are gaining ground:

Regarding the stock of asset purchases, five members of the Committee (Charles Bean, Paul Tucker, Ben Broadbent, Spencer Dale and Martin Weale) voted in favour of the proposition.  Four members of the Committee voted against the proposition.  The Governor, David Miles and Adam Posen preferred to increase the size of the asset purchase programme by £50 billion to a total of £375 billion.  Paul Fisher preferred to increase the size of the asset purchase programme by £25 billion to a total of £350 billion. Read more

The risks of dysfunctional money markets

In my remarks today, I would like to share with you some concerns about the present state of the euro area money markets, which are characterised by segmentation between cash-rich and cash-poor banks and a fragmentation along national lines. I would also like to offer some thoughts on how proper money market functioning can be restored.

So starts a recent speech by Benoît Cœuré, member of the Executive Board of the ECB, which should be required reading for everyone interested in the fragmentation of the European money markets. Read more

Further reading

Elsewhere on Tuesday,

- Top RMBS cases to watch this summer. Read more

Further reading

Elsewhere on Monday,

- Greek election round-up: Brad PlumerPaul KrugmanEdward HughMark GrantYanis VaroufakisJohn Cochrane, Joe WeisenthalRead more

Merkel’s options: Pay, inflate, or else…

How Charles Dumas of Lombard Street Research gets from this poor performance in Dutch retail sales recently…

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The (early) Lunch Wrap

Good morning New York…

FT ALPHAVILLE Read more

Further reading

Elsewhere on Friday,

- A little more on EFSF and ESM funding. Read more

Albert weighs in

On the back of the glorious victory in yesterday’s Thomson Reuters Extel survey, Societe Generale’s Albert Edwards has a note out on Spanish banks (his emphasis):

The Spanish banking sector is a victim of deflationary policies enacted at the behest of German economic orthodoxy. A bailout will solve nothing. Read more

While we wait for Opec

Remember back in March, when oil prices were high and Ali Naimi, Saudi Arabia’s oil minister, penned a letter to the FT suggesting prices were too high because there was no lack of supply and inventories were full?

Well, prices have come down since then. A quick recap from SocGen: Read more

Spanish auction: Nothing to see here, move on

Spain sold bonds today, and the auction happened without any drama. Here’s a recap from the Reuters wire:

Spain sells 2.1 bln euros in bonds. It sold 638 million euros worth of bonds maturing Oct. 31, 2014 with a 3.3 percent coupon, and 825 million euros worth of bonds maturing Oct.31, 2016, with a 4.25 percent coupon. It also sold 611 million euros of a bond maturing Jan. 31, 2022 with a 5.85 percent coupon. The Treasury had expected to sell between 1 billion and 2 billioneuros of the debt.  Read more

Further reading

Elsewhere on Thursday,

- Janet Yellen spoke on the perspectives of monetary policy. Read more

This one is for you, sports fans

The tension in Europe is unbearable. Everyone is afraid of the outcome amid scandal, upset and intrigue. This week, after months of summits, meetings and planning — it’s finally going down. We are, of course, talking about the 2012 European Championship.

With so much at stake, it’s only natural that bank analysts have a thing or two to say (because they’re the true football experts, obviously). Read more

Will rates stay low, QE or no?

It was inevitable that the abysmal payrolls report last Friday would make louder the calls for another round of quantitative easing from the FOMC, which meets later this month.

QE can take various shapes, but we wanted to mention something about the specific idea of the Fed buying up more US Treasuries: as a few analysts have pointed out recently, there’s a pretty good chance that rates will stay low no matter what the Fed does. Read more

Further reading

Elsewhere on Friday,

- The economic costs of fearRead more

Denmark: Stop sending us money

For the second Thursday in a row, the Danish central bank has cut interest rates:

 Read more

Ten-year Bund yields below 1%? Wouldn’t faze Nomura

‘Have you ever wondered why none of our Bund forecasts are definitive?,’ Nomura’s European rates strategist Desmond Supple asked clients on Tuesday.

The answer…
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The Eurepo curve spells trouble

Sandy Chen at Cenkos has drawn our attention to an interesting development in the repo market: the Eurepo curve has inverted.

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M&A flows and the (slippy) FX market

M&A flows and their impact on currencies are an especially hard thing to get a grip on – cause and effect can get quite muddied.

A recent note from UBS analyst Chris Walker took another shot at discovering  how M&A flows influence the FX markets. He argues that while M&A flows do influence FX markets, they do so largely because of expectations and speculation — not because of flows directly related to M&A transactions (UBS’ emphasis): Read more

Bankia’s influence spreads

After a weekend with lots of Bankia news, the spread between Spanish and German 10-year debt reached new euro-era highs:

 Read more

Further reading

Elsewhere on Monday,

- China is building 70 new airports. Read more

On the ECB’s attempts to ring-fence its balance sheet

The European Central Bank has recently started talking more about risk, and in particular the risks to its balance sheet. Yesterday, Standard Chartered analysts Thomas Costerg and Sarah Hewin had a note out talking about how the ECB was concerned about capital outflows from the periphery being replaced by TARGET2 inflows, and how TARGET2 imbalances might lead to a more fragmented policy. From StanChart:

ECB President Draghi recently hinted that managing risks was his utmost priority, further differentiating the ECB from other major central banks (Japan, US, UK), which have shown less reluctance about conducting broad-based quantitative easing (QE). Read more

The (early) Lunch Wrap

Good morning, New York…

FT ALPHAVILLE Read more