MacroScope

Forward!

The Bank of England will give the government its blueprint for “forward guidance” when it publishes its quarterly inflation report, a big moment in British policymaking.

Canadian Mark Carney, in his second month at the helm, was heralded in advance as the man to kick start a languishing economy but with green shoots sprouting all over the place that may not be needed. Nonetheless, if companies and households can be convinced interest rates will stay at record lows for a prolonged period, that could boost investment and spending and help solidify a recovery that now looks to be in train.

After the U.S. Federal Reserve indicated that it may soon start to phase out its bond purchases – two of its policymakers again pointed to September yesterday – the Bank of England made a first stab at forward guidance last month, saying a rise in UK market rates was misguided. Now it will be more precise.

There is a trade-off. The clearer the guidance is about how long rates will stay at record lows the more effective it will be in persuading people to spend. But if time lines are spelled out, the greater the threat to the central bank’s reputation given how quickly things can change.

Earlier this year no one was talking about robust UK growth. They are now. Safer, but less definitive, to go down the Fed’s route of setting an economic target for unemployment or GDP with an inflation caveat attached.

Full blown damage control?

Call it the great wagon circling.

Central bankers are talking tough in the face of the wild gyrations in financial markets. But it’s becoming increasingly clear they are sweating – and drawing up contingency plans to assuage the panic that’s taken hold since Chairman Ben Bernanke last week sketched out the Fed’s plan for winding down its QE3 bond-buying program. U.S. policymakers in particular must have predicted investors would react strongly. But now that longer-term borrowing costs have spiked to near a two-year high, they look to be entering full-blown damage control.

Here’s Richard Fisher, head of the Dallas Fed, speaking to reporters in London on Monday:

I’m not surprised by market volatility – markets are manic depressive mechanisms… Collectively we will be tested. We need to expect a market reaction… Even if we reach a situation this year where we dial back (stimulus), we will still be running an accommodative policy.

Draghi on the IMF and Greece: Hindsight’s a wonderful thing

ECB President Mario Draghi had an interesting couple of things to say about historical perspective at his press conference on Thursday, responding to the IMF’s admission that it lowered its normal standards to bail out Greece, among other things.

While the EU Commission came out and said some of the IMF’s conclusions were flatly wrong, Draghi took another approach. Basically, hindsight is a wonderful thing:

“If this paper by the IMF, which I have read, besides being a mea cupla, identifies the reasons for mistakes that have been made an other things, we certainly have to take them into account in the future.

Although it seems routine, rising euro zone unemployment is still shocking

 

Another month, another rise in the number of jobless in the euro zone.

As expected, the unemployment rate hit a new record 12.2 percent in April, according to Eurostat on Friday, meaning some 19,375,000 euro zone citizens are out of work.

That’s more than the populations of Austria and Belgium combined and almost a quarter are aged under-25.

However, it’s worth remembering that not so long ago, hardly any economists expected to see unemployment climb to these levels.

Mervyn King gets a “B” grade from economists… for the time being

As is now customary for retiring central bank chiefs, Bank of England Governor Mervyn King has received a warm – but not a standing – ovation from economists for his time in charge.

But if there’s one thing the last few years have shown, it’s that the legacy of prominent central bankers can sour quickly after retirement.

King received a median 7 out of 10 score for his 10 years as Bank of England governor from 39 economists polled by Reuters this week.

Want to know what the ECB is going to do? Watch the German PMI

A sudden turn for the worse across German companies should clinch an interest rate cut from the European Central Bank next week, or in June at the latest.

That’s because the latest PMI surveys, which have a decent correlation with economic growth, suggest the German economy  shifted back into reverse this month, against the expectations of economists.

And the one thing the ECB’s Governing Council never allows to pass is any sign that Germany, Europe’s No.1 economy, is floundering.

Why euro zone bond yield ‘convergence’ may be something to fear

 

Are European bond investors looking for love in all the wrong places?

The premium bankers demand to hold various types of euro zone debt over that of Germany has recently come down. In normal circumstances, this might suggest markets are no longer discriminating between the risks associated with different member countries’ bonds. But analysts say the recent convergence is based on a precarious belief of ECB action rather than any real improvement in economic fundamentals.

Spain and Italy still offer a comfortable premium over Germany. But a narrowing in yield spreads that is being driven by a fall in the funding costs of Spain and Italy, rather than by a rise in German yields, gives reason for pause.

According to Lyn Graham-Taylor, fixed income strategist at Rabobank:

The fact there is almost no movement from Germany and a huge movement in peripherals is indicative to us of this convergence for the wrong reason.

France’s downturn is more significant than you think

The huge downturn in French businesses was by far the most disappointing aspect of this week’s euro zone PMIs, which again painted a dismal picture of the euro zone economy.

Maybe it’s because grim euro zone PMIs come around with depressingly familiarity these days, but economists on the whole had surprisingly little say about this.

Still, the March survey delivered some major landmarks relating to France.

Most obviously, its services companies endured their worst month since February 2009, practically at the nadir of the Great Recession of 2008-09.

Europe’s ‘democratic deficit’ evident in Cyprus bailout arrangement

The problem of a “democratic deficit” that might arise from the process of European integration has always been high on policymakers’ minds. The term even has its own Wikipedia entry.

As Cypriots waited patiently in line for banks to reopen after being shuttered for two weeks, the issue was brought to light with particular clarity, since the country’s bailout is widely seen as being imposed on it by richer, more powerful states, particularly Germany.

Luxembourg has accused the Germans of trying to impose “hegemony” on the euro zone.  The country, whose banking system, like Cyprus’, is very large relative to the economy’s tiny size, fears that similarly harsh treatment could be imposed on its depositors.

Euro bailouts — one out, one in

We had thought the end-of-week EU summit was going to be a lacklustre affair but things are starting to bubble up.

Ireland announced last night it would issue its first new 10-year bond since it was bailed out in 2010. It sounds like the books on the syndicated issue will open today with dealers predicting strong demand. This is a crucial step in Dublin becoming the success story the euro zone desperately craves. Some European Central Bank policymakers have said the bank’s bond-buying programme could be deployed to help Ireland once it has demonstrated its ability to issue debt in a variety of maturities. Others, notably Bundesbank chief Jens Weidmann, appear less keen on the idea.

With yields below four percent (they peaked above 15 percent in 2011) and needing to raise only a few billion in debt this year, it’s not clear that Ireland even needs ECB help to put the bailout behind it, but bond-buying support would certainly seal its exit and also show the ECB’s intent to markets. Further down the line, it will be worth pondering whether Ireland’s journey demonstrates that austerity was the right medicine. Plenty of euro zone policymakers will say so. The interesting question to address would be whether Dublin could have got there faster with more leeway to boost growth and therefore tax revenues.