Macro Commentary
Everything and the kitchen sink. That’s the only way to describe the ECB’s strategy in the decision this week to increase the amount of monetary support they are offering their economy. The QE program was expanded to 80 billion euros per month (from 60 billion before), the “buy list” was expanded to include non-financial corporate bonds issued by Euro-area domiciled companies, a new targeted long-term refinancing operation (TLTRO 2) was announced with four-year maturities and borrowing rates as low as the deposit facility rate for banks that are meeting loan quotas to the real economy, the ECB deposit rate was cut by 0.1% to negative 0.4%, and the lending facility rate was cut 0.05% to 0.25%. Reading between the lines, it is our view that ECB President Mario Draghi was trying to demonstrate the range of tools that could be used in the future should it be decided to ramp up programs even further. His comments following the decision, however, raised immediate questions when, amongst other points, he noted that the negative rate policy likely would not be required to go lower. Currency markets showed the swift change in attitude best. When the decision was announced, the EUR/USD exchange rate fell from 1.10 to near 1.08 which then dramatically reversed course and popped close to 1.12 after Draghi’s press conference. We think that price action in currencies is telling about the market’s flailing confidence in Draghi’s ability to use monetary policy alone to stimulate European growth. The cost of credit does not seem to be the problem; it is the demand for credit which needs to be revived. Fiscal policy makers are yet to hear the call.
Meanwhile in Japan, where the “kitchen sink” policy was taken some time ago, a remarkable (and scary) feat happened. The Japanese government was paid to borrow money for the next decade on 2.2 trillion yen worth of debt (about $19.5bln USD). That’s right, a highly-levered sovereign nation is going to be compensated by investors for borrowing more money. Not only did the government issue 10-year maturity government debt at NEGATIVE 0.024% yield, the sale drew bids for 3.2x the amount of securities offered! At this point, over 70% of Japanese government bonds (JGBs), or about 600 trillion yen (or $5.3 trillion US Dollars), have a yield of zero or below. It seems that savers in Japan are having their wealth taken…literally.