This morning the ECB has made a rather curious move. But before we get to that let me remind you of what is making all other central banks sing along with David Bowie and Queen.
Pressure, pushing down on mePressing down on you, no man ask forUnder pressure that burns a building downSplits a family in two, puts people on streets
This is being created by this as described by the Financial Times.
Federal Reserve officials signalled they are more concerned about doing too little to rein in soaring US inflation than doing too much and doubled down on plans to tighten monetary policy so it constrains the economy, according to an account of their latest meeting.
This has driven our current phase of King Dollar where this morning the Euro has dipped below 0.97. It is not that the Euro is very weak as at around 94.3 it is a little under 6% below where it started life on a trade weighted basis. But it is versus the Dollar and that is inflationary which is putting things under pressure.
Germany
A sign of the pressure is this from the German statistics office earlier.
WIESBADEN – The inflation ratein Germany – measured as the change in the consumer price index (CPI) compared to the same month last year – was +10.0% in September 2022. The inflation rate has thus increased by leaps and bounds after +7.9% in August 2022 and has remained above 7% for seven months. “The inflation rate reached a new high of +10.0% in reunified Germany.” says Dr. Georg Thiel, President of the Federal Statistical Office.
We looked at the preliminary numbers but they are now confirmed and are rattling round the system as people debate whether they are the highest for 40 or for 70 years. There is another swerve because the official Euro area measure is below.
+ 10.9% on the same month last year (provisional result confirmed)
I point this out because the mechanism they introduced to keep the recorded numbers lower is presently raising it. In the ordinary German CPI owner occupied housing is reducing the overall inflation rate because inflation elsewhere is higher and they use Imputed Rents.
Oh and I do from time to time point out the value of official forecasts.
Germany raises its 2023 inflation forecast to 7% from 2.8% and cuts its 2023 GDP forecast to -0.4% from +2.5%. ( @lisaabramowicz1 )
There is a recession issue but let’s stay with the inflation and currency theme for now.
Open Mouth Operations
From earlier on CNBC.
NEW: ECB’s Holzmann cements the case for a 75bp hike at next meeting telling @GeoffCutmore“my impression is that the markets are spot on. [75bps] was the increase we had in last month. Also what to expect for the next meeting next week? I think it will be similar level”
Yesterday he guided us towards a 2% deposit rate at the end of this year.
75Bp In Oct, 50Bp Hikes In Dec Would Get Us To Neutral ( @LiveSquawk)
Another policymaker wants to go further according to @CNBCJou.
ECB‘s Wunsch tells @GeoffCutmore: rates will have to move over the 2% rate, wouldn’t be surprised to get to 3% #IMFMeetings
This is the response to inflation and falls versus the US Dollar.
One other matter of note is that Forward Guidance has been formally abandoned and they are instead guiding us forwards.
Eurobonds
This hardy perennial of a story usually goes like this.Italy and various others are very keen and Germany and its allies say no. Yet maybe there are some winds of change in Germany.
Scholz will reverse a steadfast German position and support joint issuance of EU debt to cushion the blow of the energy crisis as long as the money is disbursed as loans, not grants. ( Bloomberg)
This had an immediate impact on the Italian bond market which had a immediate party in the hope getting some much cheaper debt. If we compare its benchmark bond yield ( ten-year) with Germany there is a difference of 2.4% so it would be a very material change.
As ever such reports come with denials and a whole load of “sauces”. But maybe things have changed as countries come to terms with the scale of energy packages likely.
Finding itself in the eye of the storm of Europe’s energy crisis, Germany’s sizable support packages (amounting of up to EUR 295bn – 7.7% of GDP) have drawn the ire of other EU countries lacking the same fiscal firepower and fearing distortions within the EU’s internal market ( Danske Bank)
Germany can afford it but not everyone can. After all if the UK is being “fiscally irresponsible” then it is hard to know where to start with some Euro area nations.
Also whilst it is still relatively low the benchmark yield in Germany is 2.3% now and looks in possible danger should this come true.
The Banks
We have a long-running theme of The Precious! The Precious! Yet this morning we have seen something rather curious.
WASHINGTON, Oct 12 (Reuters) – European Central Bank policymakers are closing in on a deal to change rules governing trillions of euros worth of loans to banks in a move that will shave tens of billions of euros off in potential banking profits, sources close to the discussion said.
Euro zone banks sit on 2.1 trillion euros ($2.04 trillion) of cash handed out by the ECB at ultra-low, sometimes even negative interest rates, in the hopes that doing so would help kick-start the economy.
This to my mind is central banks coming to terms with the fact that the QE party is hitting the wall even for them or as the Beatles put it.
You never give me your moneyYou only give me your funny paperAnd in the middle of negotiationsYou break down
If they raise interest-rates as claimed then QE will be making large losses and the various treasuries will be getting itchy shirt collars. So even the banks are being hit.
Bad news for the ECB’s credibility, changing TLTRO rules retroactively.
Bad news for banks, weighing on net interest income.
Bad news for markets, as some options would worsen collateral scarcity.
Bad news for the economy, ultimately. ( @fwred )
It does confirm one of my themes though. Remember when Mario Draghi assured us the ECB was “a rules based organisation”? Well only until they change them…..
Oh and there was by contrast some good news for Monte Paschi.
Italian lender Monte Paschi will proceed with its €2.5 billion rights offer after signing an underwriting agreement with a group of banks ( Bloomberg)
Let me qualify that as of course some combination of buyers and underwriters will if past history is any guide end up going all South Park.
And it’s gone
Comment
I have held back the next issue to last which is that the ECB is perhaps the most extreme case of getting its interest-rate timing all wrong with what are looking like really bad consequences. Having spent the early part of this year assuring us there would be no interest-rate rises it is now in a type of panic. The problem is that in the meantime the future looks a lot darker. Literally if energy rationing and power cuts arrive this winter. But also via this.
Germany ……cuts its 2023 GDP forecast to -0.4% from +2.5%. ( @lisaabramowicz1)
That accompanies the IMF suggesting Germany and Italy will fall into recession next year. Now I have very little faith in the numbers of the bodies above ( they have both just been very wide of the mark). but we do learn something by the fact that events have caused them to change their forecasts substantially.
Should we get a hard winter it will be much worse…