Reflation threat to bonds as money supply catches fire in Europe
Central banks are taking out loose-money insurance against a crisis in China, but they risk being caught badly off guard by surging money growth as stimulus bites
By Ambrose Evans-Pritchard
5:52PM BST 27 Aug 2015
Euro boom: The ECB is in no hurry to wind down QE
Eurozone money supply is surging at a blistering pace as stimulus gains traction, signalling a powerful economic recovery over coming months and raising the risk of a mjaor sell-off in bond markets.
The growth of narrow M1 money surged to 12.1pc in July, higher than the peak levels seen a decade ago when the EMU credit boom was reaching a crescendo.
The surge is the clearest evidence so far that zero interest rates and €60bn of asset purchases each month by the European Central Bank are starting to ignite the eurozone’s damp kindling wood.
The growth of narrow M1 money surged to 12.1pc in July, higher than the peak levels seen a decade ago when the EMU credit boom was reaching a crescendo.
Such explosive rates of growth are usually associated with over-heating. The M1 figures cover cash and current accounts. They are watched closely by monetarists for clues of future spending and economic vigour six months or so ahead.
The surge is the clearest evidence so far that zero interest rates and €60bn of asset purchases each month by the European Central Bank are starting to ignite the eurozone’s damp kindling wood.
Doubts are growing over whether the ECB really can keep going with quantitative easing at the current blistering pace. “It is full steam ahead. I don’t see how they can continue to do QE until September (2016),” said Simon Ward from Henderson Global Investors.
“It will be clear by early next year that there is a lot more life in the eurozone economy than people think. The bond markets are going to be vulnerable,” he said.
The yields on Europe’s sovereign bonds are still at historic lows, priced for depression as far as they eye can see. Two-year yields are negative in 14 countries, including Ireland, Slovenia, Latvia and the Czech Republic.
Ten-year yields are 1.09pc in France, 0.74pc in Germany and -0.17pc in Switzerland. Any sign that growth is picking up and that the "output gap" is closing faster than expected in these countries could lead to a spike in yields, and potentially a full-blown bond rout.
The eurozone’s broader M3 measure of the money supply is growing more slowly than M1 but has reached a post-Lehman high of 5.3pc. Private sector lending is coming back from the dead after three years of outright contraction.
Loans to households rose by 1.9pc. Demand for housing loans and consumer credit is rocketing, surpassing levels reached at the height of the previous boom.
Capital Economics
The ECB is in no hurry to wind down QE. Vice-president Vitor Constancio raised eyebrows this week with hints that Frankfurt might actually increase the dosage if needed to stop inflation falling too low, or to avert further fall-out from trouble in China.
“The Governing Council stands ready to use all the instruments available within its mandate to respond to any material change to the outlook for price stability,” he said.
Neil Mellor, from BNY Mellon, said the ECB risks a policy mistake by keeping the taps on too long to meet its inflation target. “There is a risk that this will end in asset price inflation, and we should have learned from 2008 how much damage asset booms can do,” he said.
The inflation price data have been distorted by the slump in oil and commodity prices over the past year. Modern central banks usually take the view that such "positive supply shocks" increase spending power and are therefore benign.
A parallel debate is raging in the US, where Federal Reserve officials have begun to talk down the likelihood of a rate rise in September, even though GDP growth was revised up to 3.7pc in the second quarter and the labour market is tightening fast.
New York Fed chief Bill Dudley said the need for monetary tightening is "less compelling than it was a few weeks ago".
Authorities on both sides of the Atlantic have to pick between two powerful and opposing threats: the risk of a deflationary slump if the China buckles and the emerging market crisis turns systemic; against the risk that central banks could fall behind the curve and leave too much stimulus in their own economies.
They seem more inclined to take out an insurance policy against a possible crash in China. But this could come back to haunt them if "animal spirits" revive in earnest in America and Europe.
Gilles Moec, from Bank of America, said the ECB has been pursuing an “asymmetric” policy for several months. It has firmly dismissed any talk of ending QE early, but has responded quickly with hints of more stimulus each time there is a hiccup.
The ECB’s gauge of inflation of expectations – 5-year/5-year forwards – has dropped to 1.62pc, a sign that market thinks the bank will struggle to meet its 2pc target in the foreseeable future.
Mr Moec said the ECB is right to err on the side of caution, given the risk that the oil price slump could – in these particular circumstances – cause a disinflationary psychology to become entrenched.
Bank of America said the ECB would be forced to “beef up QE” by the end of this year to hold the line against deflation and stop the euro rising.
While the ECB is in one sense capping yields by buying bonds, this effect could be overwhelmed by fundamental forces if the markets start to price in higher growth. Yields rose rather than fell with each episode of QE in the US.
Bill Gross, the legendary bond guru at Janus, said in April that German Bunds were the “short of a lifetime”. Yields surged threefold and he made a windfall profit.
The great question for the bond market is whether Europe and America are caught in a permanent Japanese deflation trap, or whether their economies are breaking free and returning to normal after six years of chronic malaise. If the latter, the bond sell-off has barely begun.
“It will be clear by early next year that there is a lot more life in the eurozone economy than people think. The bond markets are going to be vulnerable,” he said.
The yields on Europe’s sovereign bonds are still at historic lows, priced for depression as far as they eye can see. Two-year yields are negative in 14 countries, including Ireland, Slovenia, Latvia and the Czech Republic.
Ten-year yields are 1.09pc in France, 0.74pc in Germany and -0.17pc in Switzerland. Any sign that growth is picking up and that the "output gap" is closing faster than expected in these countries could lead to a spike in yields, and potentially a full-blown bond rout.
The eurozone’s broader M3 measure of the money supply is growing more slowly than M1 but has reached a post-Lehman high of 5.3pc. Private sector lending is coming back from the dead after three years of outright contraction.
Loans to households rose by 1.9pc. Demand for housing loans and consumer credit is rocketing, surpassing levels reached at the height of the previous boom.
Capital Economics
The ECB is in no hurry to wind down QE. Vice-president Vitor Constancio raised eyebrows this week with hints that Frankfurt might actually increase the dosage if needed to stop inflation falling too low, or to avert further fall-out from trouble in China.
“The Governing Council stands ready to use all the instruments available within its mandate to respond to any material change to the outlook for price stability,” he said.
Neil Mellor, from BNY Mellon, said the ECB risks a policy mistake by keeping the taps on too long to meet its inflation target. “There is a risk that this will end in asset price inflation, and we should have learned from 2008 how much damage asset booms can do,” he said.
The inflation price data have been distorted by the slump in oil and commodity prices over the past year. Modern central banks usually take the view that such "positive supply shocks" increase spending power and are therefore benign.
A parallel debate is raging in the US, where Federal Reserve officials have begun to talk down the likelihood of a rate rise in September, even though GDP growth was revised up to 3.7pc in the second quarter and the labour market is tightening fast.
New York Fed chief Bill Dudley said the need for monetary tightening is "less compelling than it was a few weeks ago".
Authorities on both sides of the Atlantic have to pick between two powerful and opposing threats: the risk of a deflationary slump if the China buckles and the emerging market crisis turns systemic; against the risk that central banks could fall behind the curve and leave too much stimulus in their own economies.
They seem more inclined to take out an insurance policy against a possible crash in China. But this could come back to haunt them if "animal spirits" revive in earnest in America and Europe.
Gilles Moec, from Bank of America, said the ECB has been pursuing an “asymmetric” policy for several months. It has firmly dismissed any talk of ending QE early, but has responded quickly with hints of more stimulus each time there is a hiccup.
The ECB’s gauge of inflation of expectations – 5-year/5-year forwards – has dropped to 1.62pc, a sign that market thinks the bank will struggle to meet its 2pc target in the foreseeable future.
Mr Moec said the ECB is right to err on the side of caution, given the risk that the oil price slump could – in these particular circumstances – cause a disinflationary psychology to become entrenched.
Bank of America said the ECB would be forced to “beef up QE” by the end of this year to hold the line against deflation and stop the euro rising.
While the ECB is in one sense capping yields by buying bonds, this effect could be overwhelmed by fundamental forces if the markets start to price in higher growth. Yields rose rather than fell with each episode of QE in the US.
Bill Gross, the legendary bond guru at Janus, said in April that German Bunds were the “short of a lifetime”. Yields surged threefold and he made a windfall profit.
The great question for the bond market is whether Europe and America are caught in a permanent Japanese deflation trap, or whether their economies are breaking free and returning to normal after six years of chronic malaise. If the latter, the bond sell-off has barely begun.
0 comments:
Publicar un comentario