Europe quantitative easing
This is a guest post from Richard Koo, chief economist of the Nomura Research Institute and, amongst many other things, author of “The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession”, which lays out his balance sheet recession thesis in detail. The post is an updated extract from his most recent note for Nomura and reproduced here, with his permission, for your arguing pleasure… The US, the UK, Japan, and Europe all implemented quantitative easing (QE) policies, but the understanding of how those policies work apparently differs greatly from country to country, leading to very different outcomes. With the US economy doing better than the rest, there has been some debate in Europe as to why that is the case.
A new era – German 10-year bund yield drops below zero for the first time: pic.twitter.com/XJAoFDZ3mE — Tracy Alloway (@tracyalloway) June 14, 2016 Yeah. Fun. This is also fun: Make that 50% of Bunds no longer eligible to ECB QE! (€400bn out of €810bn) pic.twitter.com/y8qP7fHk3c — Frederik Ducrozet (@fwred) June 14, 2016
It’s all a bit messy at the moment — European banks, Japanese banks post the BoJ’s move negative, er other stuff — but it’s not really clear what’s actually going on. This seems like a decent list of possibilities, from Citi’s Steven Englander: We think the following concerns are weighing on the market. 1. US economic fragility means there is no one to depreciate against 2. Too many simultaneous issues and policy coordination unlikely. 3. QE/negative rates have lost their financial market impact, 4. QE/negative rates have lost their economic impact 5. QE/negative rates are constrained by bank profits But his colleague Matt King has a somewhat more involved, if not entirely separate, explanation for what he says is, at the surface, an orderly sell-off but which hides a number of indicators under “extreme stress”. Basically, it’s all about bank balance sheets coming under pressure. Less basically, he suggests these dislocations “raise awkward questions about the entire narrative which led to the wave of post-crisis bank regulation.”
Here’s the Fed’s recent hike in context, courtesy of BofAML’s Hartnett et al. You might need to squint… When you’re done squinting, you might also dwell on the fact that long-term rates matter much more than short-term rates in the US and that we might be about to enter “conundrum” territory once again,
A tiered depo rate (to be explained below) coming from the ECB at their meeting on Thursday, you say? Allowing them to potentially push past the expected (per our inboxes) coming cut in the depo rate by 10bps to -0.30 per cent, alongside other easing measures? Well… the mooted tiered system itself wouldn’t be unprecedented and we look forward to even the expected cut allowing our go-to measure of euro-nuttiness to keep ticking up. From JP Morgan’s Niko Panigirtzoglou and team over the weekend:
Some of you may remember how the ECB fecked up last week, when “an internal procedural error” meant an eventually market moving speech given by one Benoît Coeuré on Monday to, amongst others, a load of hedgies wasn’t made public until Tuesday morning. The speech — apart from starting a debate about Chatham House rules, priviliged information and knee jerk responses by the ECB — was about ECB plans to front-load their bond purchases in May and June. And as Citi’s credit specialist Matt King said: “If the ECB had wanted to test the extent to which traders were hanging on their every word, they could hardly have come up with a better experiment than to promise to boost the pace of QE purchases today, only to cut it back during the summer.”
The long awaited, much predicted start of the great turning point in bond markets after which yields will rise, prices fall and teeth gnash has arrived. Maybe. We have had a moderate bit of violence and surprise in fixed income, after all. A sample of sentiment below, but a word of caution up front: higher volatility might have caused the market moves, meaning the big reaction is still to come and/or potentially distant. Here’s Jens Nordvig of Nomura late on Tuesday:
On the back of news “that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer” — really scuppering the plans of those local governments to restructure their massive debts — some rumours of “Chinese QE” began floating about over the past few days. But that seems to have passed…. and now it’s chatter of an ECB style LTRO that’s being heard in the wind. Either way though, we think it would be a better idea to forget the QE or LTRO comparisons this time around — it muddies the water — and instead concentrate on what China is trying to achieve.