I started this week looking at Japan with its depreciating currency and its unwillingness to raise interest-rates. There was confirmation of the latter point yesterday and indeed this morning.
TOKYO, April 20 (Reuters) – The Bank of Japan on Wednesday boosted efforts to defend its yield target, making a fresh offer to buy an unlimited amount of the 10-year bonds for four consecutive sessions.
So it continues to cap its benchmark bond yield at 0.25%. We can move on to a place that increasingly looks like it is turning Japanese which is the Euro area. This morning ECB Vice-President de Guindos has been conducting some open mouth operations via an interview with Bloomberg. They have summarised it like this.
The ECB should be able to phase out asset purchases in July to pave the way for an interest-rate increase as early as that month, according to Vice President Luis deGuindos.
Actually that is not quite what he said and indeed some of what he said was contradictory so let us take a look.
Our prediction was for growth of a little more than 4% this year, and an inflation rate that was clearly on the rise. We had underestimated inflation for a period of time.
If he believed that then they should have raised interest-rates in response but sadly the journalists missed that point. If not then now.
The consequences for inflation are quite clear. Inflation is accelerating because of energy prices, commodity prices and supply bottlenecks. But simultaneously we’re seeing a reduction in growth through a deterioration of trade. The message is crystal clear in this respect – we’ll see higher inflation and lower growth
But he is already deferring things by apparently claiming he cannot think ahead now and has to wait.
That should be reflected in our June outlook.
So we have our first cautionary point which is after not acting before he is not going to act with inflation over 7%. Which really rather begs the question of what would make him act as he is supposed to aim at 2% and the forecasts he is waiting for have gone badly wrong.
We had underestimated inflation for a period of time.
If the APP ends in July, is a rate increase possible in July as well?
This question actually got him moving away from a July interest-rate rise.
But we need to keep in mind that we have now clearly delinked the end of the APP to the first rate hike, so a rate hike doesn’t need to come automatically once the APP ends. We can have some time in between and we are data-dependent.
Again let me make the inflation point if not at 7% what inflation data is he dependent on? When pressed he also shifted to September.
It will depend on the data we see in June. From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide.
Actually if we look at his inflation view then there will be less reason to raise interest-rates then than now.
We believe we are getting closer to the peak. Inflation will start to decline in the second half of the year. But even so, it will be above 4% in the final quarter.
So 7% is not enough but 4% is?! As OMC put it.
How bizarre
How bizarre, how bizarre
Ooh, baby (Ooh, baby)
It’s making me crazy (It’s making me crazy)
What about a recession?
It was interesting that he found himself having to deny there would be a recession.
A technical recession – two quarters in a row of negative growth –, is not currently part of our projections.
Indeed he was also trying to dismiss the idea of stagflation.
If we define it as negative growth year-on-year with very high inflation, then even in the severe scenario, we do not see stagflation.
As you can see he has given himself so elbow room by defining it as an annual fall in output which is not the definition at all as the “stag” bit makes clear.
He is unable to avoid pointing out that things are getting worse.
But simultaneously we’re seeing a reduction in growth through a deterioration of trade.
That was reinforced by the German export figures released earlier.
WIESBADEN – In March 2022, exports from Germany to countries outside the European Union (third countries) fell by 7.2% compared to February 2022, after calendar and seasonal adjustment.
The main player was this.
Compared to March 2021, German exports to the Russian Federation fell by 57.5% to 1.1 billion euros as a result of the sanctions imposed against Russia because of the war in Ukraine,
In case you were wondering about trade with Ukraine we only get the ten largest trading partners at this stage so we merely know it was not one of them.
Actually things are worse than he is saying which he revealed inadvertently.
The longer inflation remains high, the higher the possibility of having wage indexation clauses in the collective bargaining process. We have not seen much in terms of wage increases so far in Europe.
As we note this morning’s inflation release we see that real wages are falling quickly. Certainly by 3% per annum and maybe more.
The euro area annual inflation rate was 7.4% in March 2022, up from 5.9% in February. A year earlier, the rate was 1.3%.
That is a road to nowhere on which we could easily see a contraction and perhaps a recession.Also in something of a perversion of their role they will respond if they see wages rise in a sort of echo of the words of Governor Bailey of the Bank of England that so backfired on him.
The main risk is that this type of inflation starts to be more and more persistent and gives rise to second-round effects. We need to monitor this very, very closely.
More! More! More!
Overnight we heard this from another ECB policymaker.
The European Central Bank could lift policy rates above zero before the end of the year unless the euro-zone economy suffers a severe shock, and it might even have to deploy “restrictive” policy to get surging prices under control, Governing Council member Pierre Wunsch said.
So positive interest-rates and a restrictive policy? Oh but as I am expecting a “severe shock” that rather fades like a shower on a sunny day.
Comment
It is not a coincidence that we suddenly have several ECB policymakers talking about higher interest-rates as there is clearly a plan to put that in our minds. It has worked for now in the foreign exchange market for now as the Euro has risen above 1.09 versus the US Dollar. But economic policy needs to be set for months and years not daily foreign exchange moves. I have explained the contradictions in what we have been told so let me now switch to another reason why I do not believe this is genuine.
Moment of truth coming for Italian BTP facing low growth, high inflation, ECB exit and political risks? Bond yields are exceeding the average cost of debt for the first time since the 2018 crisis. ( @fwred)
Just as Italy has a lot of debt to refinance.
Over the next 18 months, Italy is looking at refinancing EUR 400 bn of maturing bonds with – Much higher rates – A likely recession – Elections in Q2-23 Keep the Italian risk on your radar ( @MacroAlf )
I am not sure the ECB can stop QE as last time it tried it only lasted ten months and this time looks worse! We will have to see how 2022 plays out but inflation is high and the economy is heading south. We simply do not now yet how far south. We do know that policy easing can be done in a day as opposed to tightening which even in these open mouth operations is at best months away.