On the potential death of that long awaited negative deposit rate, interesting thoughts from HSBC’s Steven Major below if sovereign quantitative easing does eventually raise its head in Europe.
But first, a necessary nod to QE skepticism from Peter Stella:
Rather amazingly, a crude quantitative measure of ECB stimulus—the sum of refinancing operations and securities held for monetary policy purposes—peaked the very month of Dr. Draghi’s [whatever it takes] speech. Those who are now seeking QE apparently believe that, despite the inverse correlation between quantitative stimulus and actual results, an increase in the size of the ECB balance sheet will lead to an outcome superior to that associated with the increase in policy “size” evident above during the 14 months prior to the Draghi speech. During that time, the sum of ECB monetary operations instruments expanded by 168 percent without any discernible palliative impact on markets. So if the definition of insanity is repeatedly trying the same behavior and expecting different results, the market would appear slightly insane. Or perhaps it is simply guilty of failing to fully comprehend the complexity of monetary operations, and more specifically, which monetary medicines work and which do not.
With the European Central Bank keeping everyone guessing on the prospect of Eurozone QE, uncertainties over exactly how Draghi will choose to act to curb the deflation risk building in the region are beginning to create a headache for non-Eurozone members such as Poland.
Whilst Poland’s economy has proved resilient to the downturn thus far, deflationary trends are creeping into the country putting central bankers under pressure to act decisively sooner rather than later. The key metric everyone is worried about is a dip in Poland’s annual rate of consumer price inflation to a negative 0.3 per cent. Read more
A farewell to QE (of sorts) from Michael Hartnett et al at BofAML:
A recent US Treasury paper calculated that between Jan’09 and Apr’13 the S&P500 index rose 570 points in the weeks the Fed bought $5bn or more securities, 141 points in the weeks it bought up to $5bn, and fell 51 points in the weeks the Fed sold securities.
The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.)
We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions).
Let’s start by looking at the changes in actual inflation since the start of 2010. Read more
Reuters is reporting that the European Central Bank might be willing to purchase corporate bonds as part of its €1 trillion effort to restore “the size of [its] balance sheet towards the dimensions it used to have at the beginning of 2012.” The story has also been picked up by the FT and WSJ.
We didn’t immediately get why the ECB would decide to do this, especially since spreads on even the junkiest of junk debt are still quite narrow. (Lufthansa’s recent 5-year note yielding just 1.1 per cent at issuance comes to mind.)
One explanation is that the size of the markets the ECB has already agreed to target — asset-backed securities and covered bonds — is too small for the central bank to achieve its objectives. Read more
Deutsche’s George Saravelos isn’t entirely convinced by the calls for QE4/QEmore rattling through our inbox from those on the receiving end of this correction.
Those looking to the Fed to save the day are looking at the wrong place. First, unlike the September 2013 non-taper, US rates have rallied and American data surprises are close to their highs. Second, this is not about the US but the rest of the world. Bunds and gilts have rallied 9-10% this year compared to a 6% rally in USTs. This is about global, not American fears. It is about how the world transitions away from Fed-driven liquidity (QE winds down this month) to the rest of the world.
Or QEinfinity continued we suppose.
From Deutsche’s Jim Reid the morning after the liquidity crisis before:
With all this going on one wonders what probabilities you’d get that the Fed actually does QE again before it raises rates. I’m sure if you’d have suggested this a month ago many would have thought that there was more chance of Elvis being found living a relaxing retirement on the moon.
Some pre-ECB musings from Lombard Street’s Dario Perkins (with our emphasis):
Market economists remain divided on the issue of whether the ECB will do QE, not because they disagree about whether it is needed – here there is near unanimity – but because they aren’t sure Mr Draghi can overcome philosophical and technical opposition from some of his colleagues…
Fortunately, those opposed to QE at the Bank seem to have softened their stance a little recently.
Governments need to reform their labour markets, reduce taxes that weigh on business, free companies from red tape and continue to repair their public finances. Merely talking about such reforms is not enough…QE would merely enable governments to borrow even more cheaply, giving recalcitrant politicians an easy way out.
[...] Read more
The final report from Smithers & Co has landed, as the septuagenarian scourge of “stockbroker economics” eases into retirement.
We are assured that he’ll still be blogging for the FT, but the regular research output will cease. The valedictory note is, as you might expect, on the bearish side of things:
The US equity market is overvalued to an extent only experienced five times before in the past 212 years. On two occasions, however, it has risen well above the current degree of overvaluation.
… and back on the “buy foreign bonds” option. Never mind the former might never happen, let alone happen when the ECB meets next week and does its best not to disappoint.
From Morgan Stanley’s FX team: Read more
Yeah, we know, it’s semantic. China are already the kings of QE. But bear with us for a bit. The nature of their QE may be changing.
From Stephen Green and Becky Liu at Standered Chartered: Read more
Introducing a new series tracking the slow death of the traditional investment banking model (if not banking itself).
Just to round up the recent spate of gawd awful Q1 results from the banking sector: Read more
As Martin Wolf has eloquently argued this week, yes, there is a clear-cut and urgent need for state e-money issuance.
But the case for expanding the central bank balance-sheet to the population — something which can easily be done via the issuance of sovereign e-money — does not in our opinion necessarily demand the elimination of private money issuance along with it. More than likely both forms of money can co-exist quite healthily. Read more
With his latest column on the nature of money and credit in the modern monetary system, the FT’s Martin Wolf delves deeper into the murky depths of the “what is money” debate.
Anyone who has speculated about the significance and effects of quantitative easing in the last five years should probably have a read. Read more
An interesting job going at the ECB? (Click for the details.)
RBI governor Rajan, when not being taken to task by a tie-less Bernanke, recently railed against QE spillovers. Most pertinently he said (with our emphasis):
By downplaying the adverse effects of cross-border monetary transmission of unconventional policies, we are overlooking the elephant in the post-crisis room. I see two dangers here. One is that any remaining rules of the game are breaking down. Our collective endorsement of unconventional monetary policies essentially says it is ok to distort asset prices if there are other domestic constraints to reviving growth, such as the zero-lower bound. But net spillovers, rather than fancy acronyms, should determine internationally acceptable policy.
Otherwise, countries could legitimately practice what they might call quantitative external easing or QEE, whereby they intervene to keep their exchange rate down and build huge reserves. The reason we frowned on QEE in the past is because we believed the adverse spillover effects for the rest of the world were significant. If we are unwilling, however, to evaluate all policies based on their spillover effects, there is no legitimate way multilateral institutions can declare that QEE contravenes the rules of the game. Indeed, some advanced economy central bankers have privately expressed their worry to me that QE “works” primarily by altering exchange rates, which makes it different from QEE only in degree rather than in kind.
Unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation…
– Mario Draghi, April ECB press conference
Don’t try saying that with a mouthful of peas.
More seriously, spot the caveats. A few members of the ECB governing council have since added to the noise around ECB QE — Nowotny, Mersch, Constancio, Coeure and Weidmann — but we feel better no informed than when the presser ended on Thursday. Read more
The rather less dramatic sequel is brought to you by Nomura:
Actually, it’s a €1.5tn question… at least according to SocGen. But it’s not very clear if that matters considering the barriers to euro area QE are so high.
We don’t suppose the killer argument in favour will be that “an ECB QE programme of €1.5 trillion could lower the 10y Bund yield by 100bp, pushing it down close to the 10y yield of JGBs (0.6%)”, though it’s worth a shot. There might be more mileage in pushing the Dax angle. Read more
That isn’t one of the pungent lines from a BofAML note on Tuesday — dissecting “an international leverage binge, yet another carry trade, the third in 20 years,” by issuers of corporate bonds in emerging markets.
But there are plenty already:
The Fed giveth and the Fed taketh away
The long-term emerging market equity story is the story of wars
In each cycle, risk morphs – we repeat the mistakes of our grandfathers, not our fathers.
That, and a call for this $2trn carry trade to unwind as the Fed begins rolling liquidity back. Which makes investing in EM not so much about EM — as about what the Fed will be doing as it exits policy.
Just how much would tickets go for at a German Constitutional Court hearing into any future quantitative easing programme by eurozone central banks… if a €1tn programme could easily buy a fifth of German bonds in a year?
Here’s an interesting little side note from Joseph Abate at Barclays’ Global Rates team last week on the subject of rising demand for paper money:
Despite the attention the bitcoin and other electronic payments attract, the demand for old-fashioned paper money is surprisingly robust. Paper money is growing at a 7% annual rate, reflecting non-US demand and the $100 bill’s role as a store of value.
• Growth in currency demand has cooled since early 2012, yet it remains considerably faster than nominal consumption.
• Much of the demand for US currency results from its use as a stable store of value, which is reflected in high per capita holdings and its use abroad.
• Super-low rates on highly liquid assets such as money funds and checking account balances have meant that the opportunity cost of holding currency is low.
• Currency growth will determine how quickly the Fed’s balance sheet normalizes after it stops buying assets and re-investing maturing securities. We expect the precautionary demand and the higher opportunity costs to slow annual growth to 3% or less.
First, rewrite history (as Aufhebung). Read more
We promised at the end of our previous post that we would qualify the economic case for the introduction of “free money” with some direct references to Willem Buiter, Citi chief economist and former BoE MPC member.
So here follow some of his observations on all things “money” during a liquidity trap, as plucked from his papers on seigniorage, the nature of irredeemable fiat money, numerairology and the use of virtual currencies to break through the ZLB from the last decade or so. Read more
In our money entanglement posts this week, we presented the view that a nation’s money should not be judged as a neutral and interchangeable stock of identical value units, since it’s actually made up of a web of competing monies, issued by many different entities.
These units appear to be identical, however, because system preferences — especially during periods of economic stability — encourage convergence to the most liquid and most money-like of all the units: namely the state currency.
In reality, however, not all money units are created equal.
It is during financial panics that the market is violently reminded of the inherent inequality of the money that circulates through the system. The panic grows as the market realises the money market is so entangled there is no efficient way of segregating corrupted value units from trusted units, at least not without turning to overt collateralisation. Read more
In the last few weeks the “Is QE deflationary?” debate has fused with the “What’s the natural rate of interest anyway?” and the “Is it really all about the risk premium?” conversation.
Many important insights have been offered by a whole host of people. A notable development, however, came in the shape of Tyler Cowen’s post on negative T-bill returns in which he considered the phenomenon of T-bill “entrance fees” during a zero-rate climate and how this can take returns for many investors into negative nominal territory, while providing advantages to those with access to “special technologies’” even when official rates are very mildly positive. Read more
As we’ve noted before it’s all feeling a little 1999 out there.
Lombard Street ‘s Dario Perkins agrees. He’s just released research entitled “Party like it’s 1999″, in he notes: Read more
We first proposed the idea that QE could be (but wasn’t necessarily) deflationary a couple of years ago. It was dubbed a counter-intuitive idea by Tyler Cowen.
More recently, a similar proposition has been made by Stephen Williamson — though this time using models and proper math. His view is a little different to ours because it’s less focused on the safe asset squeeze and more on the conditions that generate a preference for cash over yielding paper in the first place. Hint: you have to think the purchasing power of cash will go up regardless. Read more
The Federal Reserve’s Framework for Monetary Policy –Recent Changes and New Questions. Click to read the full doc.