As noted in our ECB preview, where we discussed that the biggest question facing investors today would be whether the ECB would taper the pace of PEPP purchases in the fourth quarter, moments ago the ECB published its statement which confirmed that the central bank would indeed taper (but don't call it that or else stonks can get spooked).
While keeping the bulk of its policy in place (rates unch, APP unch) the ECB Governing Council decided to conduct purchases at a “moderately lower pace” than the roughly 80 billion euros ($95 billion) of monthly acquisitions deployed in the past two quarters, according to a statement on Thursday, to wit:
"Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters."
As a reminder, this is how Nomura sees the ECB's taper proceeding:
The world's largest hedge fund also reiterated a pledge to keep the €1.85 trillion program running until March 2022 or later if needed, signaling they’re not yet ready to discuss how and when to end emergency stimulus even as they are starting to taper it.
The tapering comes as some governors have started to warn publicly that maintaining an ultra-accommodative stance for too long also carries risks. Austria’s Robert Holzmann and Klaas Knot of the Netherlands both told Bloomberg in separate interviews last week that emergency asset purchases should end in March, hinting at heated discussions about the policy path in the months ahead.
Some more highlights from the statement:
- Deposit rate kept at -0.5%, main refinancing rate at zero
- Inflation may moderately exceed goal for transitory period: "In support of its symmetric two per cent inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target."
- Price pressures have sufficiently strengthened
- Net purchases under the APP will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end "shortly before" it starts raising the key ECB interest rates.
- The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of EUR 1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over.
- Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.
And now attention turns to ECB President Christine Lagarde who will speak at 2:30 p.m. in Frankfurt.
Below is the key redline comparison of the ECB statements:
In kneejerk response, the euro extended its earlier advance, trading up 0.2% at around $1.1838. Italy’s 10-year yield premium over its German counterpart fell to 104 basis points, the lowest since August 25, while European stocks faded earlier losses.
While the ECB tapering its PEPP bond buying to a "moderately lower" pace was priced in, the market appears to have been expecting a more hawkish commitment, which it did not get.
Monetary policy decisions
9 September 2021
Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.
The Governing Council also confirmed its other measures, namely the level of the key ECB interest rates, its forward guidance on their likely future evolution, its purchases under the asset purchase programme (APP), its reinvestment policies and its longer-term refinancing operations. Specifically:
Key ECB interest rates
The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.
In support of its symmetric two per cent inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.
Asset purchase programme (APP)
Net purchases under the APP will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Pandemic emergency purchase programme (PEPP)
The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over.
Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.
The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.
The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.
The Governing Council will continue to provide ample liquidity through its refinancing operations. In particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.
The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
All Eyes On Inventory
You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring….
You’ve heard of the virtuous circle in the economy. Risk taking leads to spending/investment/hiring, which then leads to more spending/investment/hiring. Recovery, in other words.
In the old days of the 20th century, quite a lot of the circle was rounded out by the inventory cycle. Both recession and recovery would depend upon how much additional product floated up and down the supply chain. Deflation, too.
On the contraction side, demand might fall off a bit for whatever reason(s), retailers getting stuck with a small inventory overhang. If they think it more than temporary, or don’t have the internal cash to finance it, the retail level scales back pushing inventory to wholesalers who then cut orders from producers.
Serious enough, producers begin to cut back their own activities, maybe to the point of forgoing new hires, perhaps laying off some workers already employed. Whatever necessary to equalize reduced order flow with cost structure and input utility.
When those layoffs hit, almost certainly it cuts further into demand (unemployed workers are far more careful and constrained consumers), more inventory stuck at retailers and wholesalers, then even fewer orders for producers who must sharpen their payroll axe all over again. This vicious cycle is what used to make up the balance of any recession.
But what if inventory first accumulates for other reasons?
It may be a different look to the cycle, though not necessarily an entirely different outcome. Suppose retailers (outside of automobiles) grow concerned about supply availability or shipping times. They might naturally react by boosting their current order flow if only to increase their chances some product makes it through the clogged shipping channels.
As that increased order flow unrelated to demand continues to move back through the supply chain, it probably would only make the transportation issues that much worse. It’s already a mess, and because it’s already a mess the entire supply chain tries to stuff more goods through it rather than less, rather than giving the system some time and space to work out enough kinks.
This, of course, would probably convince retailers to do it all over again, ordering even more they don’t need now or in the near future, now more desperate to try and raise their chances of receiving anything. More trouble for the shippers and so on.
Having intentionally over-ordered, and then over-ordered again (and again?), this time what happens when the logistics get more sorted out and then deliveries rather than trickle through come pouring out? This is the cyclical question for early 2022, not the unemployment rate.
Some companies have said they are ready, and have confidently declared how they will be able to manage holding such excessive levels of product. Maybe they can. But what happens to orders down at the lower reaches? Having received all this extra inventory, retailers and wholesalers aren’t going to keep double and triple ordering.
Before even getting to demand considerations, the orders are going to drop and producers are going to become less busy. The inventory glut having been forwarded up to the retail level, maybe wholesale, it will have to be worked down over time.
This is where demand comes into it. If demand stays as robust as some might currently assume, it might not take that much time to normalize inventory, then get past the whole issue and imbalance with nothing much lost.
And if demand isn’t as good, then we’re right back into the 20th century again.
The way the supply bottlenecks of 2021 have worked out, there is going to be an inventory overhang at some point. When it does come about and how bad it will be, that’s really the demand question. There seems to be quite a bit of optimism about it, to the point of complacency while corporate CEO’s bark in the media instead about all the massive inflation they plan on throwing your way.
Inflation today (therefore not inflation) but potentially too many goods tomorrow. However the inventory cycle manifests, the one thing each would have in common is its trough – disinflationary at the least.
Manufacturing PMI’s, for what it’s worth, remain elevated as if the upward segment of that unusual cycle remains relatively intact (note: ISM for September won’t be released for another week). With ships still stacking up on the US West Coast, this makes sense. Regardless of current levels of demand, these supply problems would only feed the imbalance for another month.
IHS Markit’s manufacturing index retreated again for the flash September 2021 estimate, but it remains above 60 therefore still in the post-2008 stratosphere. At 60.5 in the latest update, it is down, though, for the second month in a row since hitting the high of 63.4 back in July. And the index was 62.6 back in May, meaning it’s been four months treading.
It is the services side which has materially declined, leading many to assume it must be due to delta COVID if goods flow is largely uninterrupted at the same time. Markit’s services PMI dropped to 54.4 in September from 55.1 in August, while its employment component fell back to just 50.
This meant the composite, accounting for both manufacturing and services, declined to a very similar 54.5. Using this measure as a guide for possible GDP in Q3, that’s working down to a very disappointing 3% or less which might otherwise raise suspicions when it comes to the sustainability of demand.
If this more serious setback really is pandemic-related, then thinking it a temporary one might keep up the order flow as well as the logistical nightmare. Then the artificial inventory cycle gets even more artificial.
It could very well be that manufacturing remains high because of inventory and not because current potential weakness is only about delta.
Should it turn out to be unrelated, or only somewhat attributable to renewed disease measures, then inventory stops being a pesky annoyance of shipping bottlenecks and potentially starts being more like its old self. While that wouldn’t necessarily mean recession in early 2022, even a substantial downturn (chances would have it globally synchronized) having yet fully recovered from the last two would be enough trouble.
This Has To Be A Mistake
This Has To Be A Mistake
While we were digging through the data for today’s household net worth report we stumbled upon something that seem…
While we were digging through the data for today's household net worth report we stumbled upon something that seem beyond ridiculous: the ratio of Household Net Worth to Disposable Net Income. At 786% in the latest quarter, the chart at first appears to be a mistake but we triple checked it, and... well, here it is.
The latest, all-time high print is an increase from 698% in Q1 and also represents the biggest quarterly increase in history!
This number is so ridiculous, it is almost 50% higher than the long-term average of 540%. More importantly, it means that the total net worth number we reported earlier today, which in Q2 hit a record high of $142 trillion, is massively inflated on the back of what is obviously the biggest asset bubble on record.
It also means that if one were to strip away the asset bubble, and net worth was purely a reasonable function of disposable income, then total net worth worth be haircut by 31%, or some $43 trillion, which incidentally, is equivalent to the net worth of the top 1% of US society...
... and which as we showed earlier today is a record 32% of total household net worth.
As an aside, the fact that the top 1% have gained $10 trillion in wealth since the covid pandemic outbreak, is probably just a coincidence, and yet...
Covid has been the best thing ever to happen to the wealthy and powerful. No wonder they don’t want it to end— Hipster (@Hipster_Trader) September 23, 2021
As for the chart which clearly has to be a mistake, we are sad to report that it isn't, and as politicians of both the Democrat and Republican party pretend to fight for the common man, all they are doing is enabling and accelerating the greatest wealth transfer in the world but not for nothing: they too want to be in the top 1%.
“Culture As An Asset”
#CKStrong Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground…
Stunning. Hedge funds hoovering up trading cards as an “alternative to equities” with the same passion Brooks Robinson hoovered up ground balls.
This is usually a sign of the endgame for markets, i.e,, the precursor to a bear market. Think the “Great Beanie Baby Bubble” of 1999.
In general, there are two types of assets,
- They can be rare—gold bars, diamonds, houses on Victoria Peak, bottles of 1982 Pétrus, Van Gogh paintings, stamps, beanie babies, or baseball cards or
- They can generate cash flows over time – GaveKal
Creating An Illusion Of Scarcity
Scarcity relative to the money stock is what its all about now, folks.
It probably won’t be long before the Fed has to bailout the baseball card market, no?
Full disclosure, I do own a Mike Trout rookie card.
Given the extreme valuations of all most all asset classes, coupled with the massive amount of money in the global financial system, markets are now really stretching, looking for, and actually attempting to create scarcity as a useful delusion to justify, rationalize, and drive speculation.
Maybe I will start collecting poop as an “anthropological asset,” put it the blockchain and super charge the price ramp by snapping a few pictures of each sample, converting them to NFTs to load up to the internet.
Then again, maybe all this is signaling the start of a big, big inflation cycle and the markets are looking to get out of cash and protect their purchasing power. But that’s too rational.
Can you believe what markets have become, folks? It is hard to see clearly when everybody is making money.
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