Thursday, March 10, 2016

Today's Links

1--Bloomberg pushes for fiscal stimulus, Bloomberg

2--Falling Earnings, Recession Warning, Ritholtz

3--This Is the Real Point of Europe’s Negative Rates, wsj

A pickup in inflation is needed to see Europe escape its debt burden

The banal answer is that the aim is to stoke inflation from its current level of minus 0.2% toward the ECB’s target of below, but close to 2%. But inflation alone is also the most important answer even when there is evidence that negative rates are failing to stimulate growth through lending and that competitive currency devaluations don't last

Inflation is a vital part of the effort to reduce the heavy burden of debt in European economies. This applies most obviously to the strained government finances of southern Europe, which are vulnerable to another downturn, but also relatively high private-sector borrowing in countries including France, Belgium and the Netherlands.

Low inflation, particularly if it proves persistent, means that debt burdens aren't being eroded as borrowers might have expected. That can force them to devote greater resources to deleveraging, hampering growth...

while real growth might be stimulated through more lending, this isn’t happening because negative rates are hurting bank profitability.

In much of Northern Europe, negative rates aren’t cutting the cost of loans. This is because banks are unwilling and often unable to pass on their own costs from negative rates onto retail depositors. Mortgage costs are already rising in Switzerland despite negative rates and higher credit costs might be taking hold within the eurozone in Germany, France and the Netherlands, according to Barclays.

The longer interest rates stay negative, the worse the effect on bank profits is likely to be. Earnings on their bond portfolios will fall, or even become a cost. Their funding costs on junior debt and some forms of bank capital may rise if investors become more worried about missed dividends or coupon payments...

Europe is in a bind and negative rates aren’t helping sluggish growth. But the policy could still help inflation by driving people and companies to spend their cash, thereby increasing the velocity of money, or by lifting expectations of inflation. And the alternative, were the ECB not to act, is to risk tighter financial conditions that make the target even harder to achieve

4--ECB Cuts Rates and Expands Stimulus, wsj

QE Expanded

ECB Expands QE to €80 Bln a Month from €60 Bln.

ECB Cuts Deposit Rate to -0.4% from -0.3%

5---IMF issues new warning on global economy

He warned that protracted low global demand coupled with financial turbulence created the risk of “negative feedback loops” between the real economy and markets, generating deflation and “secular stagnation”—a situation where the level of savings permanently outstrips the demand for investment funds.

In other words, low global demand, in large measure the result of low investment, leads to financial volatility, which in turn leads to reductions in investment, further lowering demand.

6--NIRP Kills Off All Money Market Funds in Japan

7--Negative Rates and Insurers: Be Afraid

8--ECB Faces Difficult Balancing Act to Revive Eurozone Inflation

The bank’s (ECB's) latest quarterly economic forecasts on Thursday are expected to show inflation falling far below target this year and next....Eurozone consumer prices fell by 0.2% in February from a year earlier, the first subzero reading since September, the European Union’s statistics agency said last week. Crucially, underlying inflation also fell to a 10-month low of 0.7%, indicating that lower oil prices may be feeding through to wages and other prices—a key concern for the ECB. Meanwhile, a closely watched business survey indicated last week that growth had slowed to a 13-month low....

There are clear signs of demand and credit growth weakening again in the euro area....

One reason to expect more rate cuts is that they are relatively uncontroversial within the ECB’s governing council, according to a summary of the bank’s December policy meeting. Several council members said they would favor a deeper rate cut over other stimulus tools, such as asset purchases.

The ECB, like other major central banks, is buying assets from private holders as the primary mechanism for injecting money into the economy, because the traditional lever—cutting interest rates—has been neutered by the fact that rates are at or near zero. A subzero deposit rate, the ECB argues, complements its bond purchases by encouraging banks to lend money to businesses and consumers rather than storing it with the central bank...

The European Central Bank faces a tough challenge at its policy meeting this week: how to combat persistently low inflation without undermining the region’s fragile banks.

A year after the bank launched a €1.5 trillion ($1.65 trillion) stimulus program, the euro area has slid back into deflation amid a sharp drop in oil prices, and its sluggish economic recovery appears to be stalling. The ECB has missed its inflation target near 2% for three straight years, leading some investors to question the power of its policies....

At some stage, easing policy too aggressively can backfire,” Mr. Lueck said. Subzero interest rates, he argued, not only put pressure on banks’ profits, but also send a “pretty bleak signal” to other firms, which might decide to trim their capital expenditures if they think prices won’t rise in the futures....

But adjustments could pose legal problems, some analysts say, if it skews the purchases toward Spanish or Italian government debt. That could raise concerns that the central bank was printing money to finance individual governments, which is forbidden under EU treaties.

Given the deteriorating economic outlook, some economists say that the ECB should expand the program into new asset classes such as equities or even real estate—a policy already practiced by Japan’s central bank.....

Still, fresh central-bank stimulus might make little difference when borrowing costs are already very low and demand for loans remains subdued.

Comments: Inflation's  drivers are from increasing the velocity of money, followed by rising wages, from demand exceeding supply in the labor pool. None of this exists today and hasn't for a very long time. This article talks about throwing good money after bad.  Wow.

9--Markets betting on near-zero interest rates for another decade, Reuters

World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.

Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a "secular stagnation" thesis floated by former U.S. Treasury Secretary Larry Summers.


The idea posits that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth - hampered by aging populations and slowing productivity growth - means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.


As there's likely a lower limit to nominal interest rates just below zero - because it's cheaper to hold physical cash and bank profitability starts to ebb - then even these zero rates do not gain traction on demand.

For all the debate about the accuracy of that view, it's already playing out in world markets, with long-term projections from the interest rate swaps market showing developed world interest rates stuck near zero for several years.

Take overnight interest rate swaps. They imply European Central Bank policy rates won't get back above 0.5 percent for around 13 years and aren't even expected to be much above 1 percent for at least 60 years.

Japan's main interest rate won't reach 0.5 percent for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1 percent, and a decade until UK rates reach that level.

"Although interest rates are low, they're not accommodative," said Harvinder Sian, global rates strategist at Citi in London. "The era of zero rates will be with us for years and years, it wouldn't surprise me if we're looking at another five to 10 years."


The five countries or economic blocs currently with negative deposit rates have yields below zero on all their bonds from a minimum of five years' maturity (Denmark) to a maximum of 20 years ...

Japan's prolonged fight to escape deflation is instructive. As the economy reeled from the collapse of the stock and housing markets, the Bank of Japan entered zero-interest rate territory in 1995 when it cut rates to a then record low of 0.5 percent.

More than two decades on, they've never been higher than that, despite near full employment and the largest debt burden in the world.

"Today's risks of embedded low inflation tilting towards deflation ... are at least as serious as the inflation problem of the 1970s. They too will require shifts in policy paradigms if they are to be resolved," Summers wrote last week.

For many, Japan shows that huge monetary stimulus from the central bank doesn't always lift inflation or inflation expectations, consumer or business demand, and ultimately overall growth - what's known as the "liquidity trap".

10--Earnings must grow for stocks to rise....Draghi) He added that the ECB did not anticipate needing to reduce rates further.

Murray Roos, Global Head of Sales for Equities and Prime Finance at Citi told CNBC said further measures would likely strengthen the equity market, but warned that the returns could be diminishing.

"In order for equity markets to sustainably move higher, one would expect, or need there to be earnings growth, And earnings growth we haven't necessarily come see through to a great extent."

It also extended its monthly asset purchases to 80 billion euros ($87 billion), to take effect in April. In addition, the ECB will add corporate bonds to the assets it can buy — specifically, investment grade euro-denominated bonds issued by non-bank corporations. These purchases will start towards end of the first half of 2016. ..

Plus, the bank will launch a series of four targeted longer-term refinancing operations with maturities of four years, starting in June.

At his regular media conference on Thursday, Draghi said that the set of measures would "exploit the synergies between the different instruments and … reinforce the momentum of the euro zone's economic recovery."


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