Macro Weekly How far can central banks go?

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Macro Weekly
How far can central banks go?
Group Economics
Han de Jong
Chief Economist
10 November 2014
Alleged dissent within the ECB has dominated the economic and financial news recently. It seems the ranks have been
closed, at least for now. The ECB is going ahead with aggressive further easing. We think that the compromise reached was
not to go ahead with sovereign QE, at least for the time being. Economic data released in the week just gone by was generally
constructive in the US, but mediocre elsewhere.
Leaks to the media suggest that there is dissent in the
bank is not a normal company and certainly not a normal bank.
Governing Council of the ECB. That is not good. The intensity
A leverage ratio is a solvency measure. It is an indication of
of the crisis is much lower than it was in 2011, but central
the size of losses that can be absorbed by capital. There is
bankers can certainly not rest on their laurels yet, nor can
one huge difference between the balance sheet of a normal
other policymakers. They must continue to show determination
bank and of a central bank. A central bank has a liability item
and resolve, rather than in-fighting. The eurozone economy is
that represents debt that will never be redeemed and over
weak and looks vulnerable. Inflation has undershot the ECB's
which the central bank does not pay interest. In case you are
target for almost two years and is now so low that one has to
wondering who, on earth, gives a central bank a perpetual,
say that we are just one shock away from deflation. While a
zero-interest loan, I must disappoint you: we all do. Currency in
period with negative inflation is not the end of the world, the
circulation effectively is an interest free loan we give to the
ECB cannot ignore the risks.
central bank and nobody considers asking for their money
back. We are a great creditor to have. In the eurozone,
I have recently been confronted several times with the
currency in circulation amounts to EUR 970 bn, that is almost
question how far central banks can go extending their balance
half of the ECB's balance sheet. In the case of the US,
sheets. The US Fed has boosted its balance sheet from below
currency is USD 1,307 bn, or almost 30% of the Fed's balance
USD 1,000 bn before the crisis to some USD 4,500 bn
sheet. The Fed is a more leveraged institution than the ECB:
currently. The ECB's balance sheet totals some EUR 2050 bn.
that much is clear.
Apparently, the ECB is planning to increase the size of its
balance sheet to some EUR 3,000. This represents a
If you consider an interest-free, irredeemable liability capital,
remarkable increase in leverage as they are, to my knowledge,
then the capital position of these central banks is very strong
not planning to raise additional capital. Commercial banks
and they could leverage up much further. But that does not
have just gone through the Asset Quality Review and the ECB
really answer the question of how far central banks can go. I
stress test. Discussions about the minimum leverage ratio are
suppose the real answer is that central banks can go as far as
ongoing. For now the minimum is 3%, but it looks likely this will
we let them. That is to say, as long as the public continues to
be raised. Big UK banks will, most likely, be required to have a
have confidence in the integrity of the financial system.
minimum leverage ratio of 4.05%, with the possibility that this
Nobody knows where that confidence ends, but there are no
will be raised to almost 5% depending on the business cycle.
signs that that confidence is eroding to any serious degree.
Having said that, I guess it is not wise for central banks to try
The question some clients have asked me is if central banks
and live on the edge. It is probably a binary situation,
comply with the same rules. The short answer is: no and that it
confidence is either there or it isn't. A change from 'confidence'
does not matter. At the end of July, the US Fed held USD 56
to 'no confidence' might be very abrupt.
bn in capital, against a total balance sheet of USD 4407,
implying a leverage ratio of 1.3%. The ECB had EUR 95 bn
That is all theory
capital as of 26 September, against a balance sheet of EUR
What is important for now is that the ECB is following a
2038 bn, for a leverage ratio of 4.7%. If the ECB were to
relatively aggressive course in their asset purchases. Our
lengthen its balance sheet by EUR 1,000, its leverage ratio
covered bond strategist, Joost Beaumont, estimates that the
would drop to 3.2%.
ECB has recently bought up to a third of new peripheral
covered bond issues. So the ECB is not afraid to own relatively
While it is perhaps interesting to look at these ratios and see
them move, I think they are completely irrelevant. A central
large chunks of a particular issue.
2
Macro Wee
ekly - How far
f can central banks go
o? - 10 Nove
ember 2014
4
In his press confference last Thursday, ECB President Ma
ario
gainst this reviised number, tthe 0.8% mom
m gain in Octo
ober
ag
aghi made it cllear that it wass not a slip of the tongue wh
hen
Dra
wa
as a disappoin
ntment. Industrrial production did a little be
etter,
he said earlier that the ECB wishes to exp
pand its balan
nce
ga
aining 1.4% mo
om after a reviised decline off 3.1%, which was
eet towards the
e level it was at
a in 2012 and
d clarified he w
was
she
orriginally reporte
ed as -4.0%. W
What can we say?
s
Germans get
refe
erring to March
h of that year. That
T
is serious business.
ve
ery good holida
ays. Perhaps ssome of them did
d not come back
b
ye
et in Septembe
er. Let's wait foor the October data. It still see
ems
any commenta
ators believe that the ECB
B will engage in
Ma
to us that the factors
f
that shhould be decis
sive for the future
buy
ying government bonds. Theyy may be right, who knows? B
But
ajectory of the economy aree suggesting growth
g
should pick
tra
we still feel that iit is tricky for the
t ECB. Other than size, itt is
up
p before too lon
ng.
t gain from bu
uying governme
ent
nott obvious what the ECB has to
bon
nds instead of other assets, while the dow
wnside is that itt is
verry controversia
al, particularly in Germany. A more logi cal
app
proach would b
be for the ECB
B to see if they
y can get the ssize
the
ey want in the o
other debt secu
urities markets and only enga
age
in government bond buying
g if they can't get enou
ugh
where.
sattisfaction elsew
Eco
onomic data
Eco
onomic data re
eleases were unexciting
u
this week. Measurres
of October business confide
ence were mo
ostly weaker in
em
merging econom
mies than in October.
O
On the
e other hand, tthe
US
S ISM was verry strong, rising
g from an alre
eady firm 56.6
6 to
59.0. This level was last exce
eeded margina
ally in 2011 a
and
beffore that in 200
04. US initial jobless
j
claims were also bettter
tha
an expected at 278,000 last week,
w
continuing their downwa
ard
trajectory, indica
ating a further improvemen
nt in the labo
our
ma
arket. But US p
payroll numberrs disappointed
d a little. 214,0
000
US
S jobs were added on a net basis in Octob
ber, a little shyy of
exp
pectations, though the previous two months
s were revised up
som
mewhat. This d
data is no reasson to change our view that tthe
US
S economy is d
doing relativelyy well and conttinuing to recovver
at a pace that is a
above its long-tterm potential.
e week was light on eurozo
one economic data. The mo
ost
The
closely watched were probablyy German indu
ustrial orders a
and
industrial producction for Septe
ember. Both series
s
had fal len
arply in Augusst, when orderrs were down 5.7% mom a
and
sha
pro
oduction 4.0% mom. This was blamed on the unus ual
patttern of holidayys with many more people than
t
usual takking
holidays in Augusst. A solid reb
bound was exp
pected, assum ing
e holidaymakerrs came back to
t work. The data disappointe
ed,
the
alth
hough one hass to bear in min
nd that this datta can be vola
atile
and
d is prone to re
evision. Actually, the terrible August data w
was
rev
vised up. Orde
ers were down
n ‘only' 4.2% mom in Augu
ust,
insttead of the o
originally reported drop of 5.7%. But evven
3
Macro Weeklly - How far can
n central banks
s go? - 10 Nov
vember 2014
KEY M
MACRO EV
VENTS
Day
D ate
Time
S
Saturday
08/11
1/2014
Monday
Monday
Monday
Monday
10/11
1/2014
10/11
1/2014
10/11
1/2014
10/11
1/2014
Tuesday
T
T
Tuesday
T
Tuesday
Country
Key Econo
omic Indicators and
d Events
Period
Late
est outcome
Con
nsensus
CN
Trad
de balance - USD bn
b
Oct
31.0
4
41.0
02:30:0 0
11/15/20 14
11/15/20 14
11/15/20 14
CN
CN
CN
CN
CPI - % yoy
w yuan loans - CNY
Y bn
New
Agg regate financing - CNY
C
bn
m
growth - % yoy
y
M2 money
Oct
Oct
Oct
Oct
1.6
857.2
1052.2
12.9
1.6
615.0
6
8
880.0
12.9
11/11
1/2014
11/11
1/2014
11/11
1/2014
00:50:0 0
07:00:0 0
13:30:0 0
JP
JP
US
BOP
P Current account - JPY bn
Eco nomy Watchers Su
urvey - index
B small business optimisme
o
- index
NFIB
Sep
Oct
Oct
287.1
47.4
95.3
5
552.7
Wednesday
W
W
Wednesday
W
Wednesday
12/11
1/2014
12/11
1/2014
12/11
1/2014
10:30:0 0
10:30:0 0
11:00:0 0
GB
GB
EC
Claiimant count unemp
ployment rate - %
Cha
ange in claimant co
ount - thousands
Indu
ustrial production - % mom
Oct
Oct
Sep
2.8
-18.6
-1.8
2.7
--23.3
0.7
Thursday
T
T
Thursday
T
Thursday
T
Thursday
T
Thursday
T
Thursday
T
Thursday
T
Thursday
13/11
1/2014
13/11
1/2014
13/11
1/2014
13/11
1/2014
13/11
1/2014
13/11
1/2014
13/11
1/2014
13/11
1/2014
00:50:0 0
02:00:0 0
05:30:0 0
06:30:0 0
06:30:0 0
06:30:0 0
16:00:0 0
JP
KR
JP
CN
CN
CN
US
RU
Mac
chinery orders priva
ate sector - % mom
Poli cy rate - %
ustrial production - % mom
Indu
Fixe
ed investments - % yoy
Reta
ail sales - % yoy
Indu
ustrial production - % yoy
US Job
J Openings by In
ndustry
GDP
P - % yoy
Sep
Nov 13
Sep F
Oct
Oct
Oct
Sep
3Q A
4.7
2.0
2.7
16.1
11.6
8.0
4835
0.8
-1.4
2.0
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
Friday
14/11
1/2014
14/11
1/2014
14/11
1/2014
14/11
1/2014
14/11
1/2014
14/11
1/2014
14/11
1/2014
14/11
1/2014
14/11
1/2014
14/11
1/2014
07:30:0 0
07:30:0 0
08:00:0 0
09:00:0 0
09:00:0 0
09:00:0 0
09:30:0 0
11:00:0 0
14:30:0 0
15:55:0 0
IN
FR
DE
CZ
HU
PD
NL
EC
US
US
Who
olesale price index
x - % yoy
GDP
P - % qoq
GDP
P - % qoq
GDP
P - % yoy
GDP
P - % yoy
GDP
P - % yoy
GDP
P - % qoq
GDP
P - % qoq
Reta
ail sales - % mom
Univ
v. of Michigan cons . confidence - inde x
Oct
3Q P
3Q P
3Q Q
3Q
3Q
3Q P
3Q A
Oct
Nov P
2.4
0.0
-0.2
2.5
3.9
3.3
0.7
0.0
-0.3
86.9
ABN AM
MRO
16.0
11.6
8.0
0.4
0.4
0.2
0.1
2.5
2.9
0.1
0.1
2.4
2.8
2.3
0.1
0.1
0.4
87.0
0
0.2
0.1
0.3
87.4
So
ource: Bloomberg, Reuters, ABN AM
MRO Group Econo
omics (we provide
e own forecasts on
nly for selected k ey
e variables and events)
e
If yo
ou would like to
o receive this ca
alendar by emaill on Friday, plea
ase send a mes
ssage to abn.am
mro.group.econ
[email protected]
Ma
ain economic//financial fore
ecasts
GD
DP grow th (%)
2012
2013
2014e
2015e
+3M
+12M
M
2014e
20
015e
2.3
2.2
2
2.2
3.8
U
United
States
0.2
23
0.23
0.3
1.3
3
0.3
1.7
-0.7
-0.4
0
0.9
1.7
E
Eurozone
0.0
09
0.08
0.0
0.0
0
0.0
0.0
Jap
pan
1.5
1.5
1.0
1.1
J
Japan
0.1
19
0.18
0.2
0.2
2
0.2
0.2
Uniited Kingdom
0.7
1.7
3
3.0
2.8
U
United
Kingdom
0.5
55
0.56
0.7
1.5
5
0.7
1.7
Chiina
7.7
7.7
7
7.5
7.0
Wo
orld
Inflation (%)
3.2
2012
3.2
2013
3
3.3
2014e
3.9
2015e
30/10/201
14 06/11/2014
+3M
+12M
M
2014e
20
015e
Uniited States
2.1
1.5
1.7
1.6
U Treasury
US
2.3
31
2.38
2.6
3.1
1
2.6
3.3
Eurrozone
2.5
1.3
0
0.5
0.8
G
German
Bund
0.8
85
0.83
1.0
1.4
4
1.0
1.6
Jap
pan
0.0
0.3
2
2.7
1.7
E
Euro
sw ap rate
1.0
08
1.05
1.2
1.6
6
1.2
1.8
Uniited Kingdom
2.8
2.6
1.6
1.7
J
Japanese
gov. bonds
0.4
47
0.47
0.5
1.1
1
0.5
1.1
Chiina
2.7
2.6
2
2.0
2.5
U gilts
UK
2.2
23
2.25
2.6
3.1
1
2.6
3.2
Wo
orld
Key
y policy rate
4.1
06/11/2014
4.0
+3M
4.0
4
2014e
4.0
2015e
30/10/201
14 06/11/2014
+3M
+12M
M
2014e
20
015e
Fed
deral Reserve
0.25
0.25
0.25
1.50
E
EUR/USD
1.2
26
1.24
1.25
1.15
5
1.25
1.15
Eurropean Central Bank
0.05
0.05
0.05
0.05
U
USD/JPY
109.2
115.2
115
123
3
115
125
Ban
nk of Japan
0.10
0.10
0.10
0.10
G
GBP/USD
1.6
60
1.59
1.60
1.53
3
1.60
1.53
Ban
nk of England
0.50
0.50
0.50
1.50
E
EUR/GBP
0.7
79
0.78
0.78
0.75
5
0.78
0.75
Peo
ople's Bank of Chin
na
6.00
6.00
6.00
6.00
U
USD/CNY
6.1
11
6.11
6.17
6.25
5
6.17
6.25
Uniited States
Eurrozone
Sou
urce: Thomson Re
euters Datastream
m, ABN AMRO Grroup Economics.
3 interbank ratte
3M
1 interest rate
10Y
e
C
Currencies
30/10/201
14 06/11/2014
4
Macro Weeklly - How far can
n central banks
s go? - 10 Nov
vember 2014
nd out more abo
out Group Eco
onomics at: http
p://insights.ab
bnamro.nl/en/c
category/econ
nomy/
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