MacroScope

Trichet

The European Central Bank is breathing a sigh of relief as it managed to take back 442 billion euros in emergency loans lent to banks a year ago without blowing a hole in money markets.

Banks borrowed modestly from two extra lending operations the ECB offered to sweeten the payment deadline, rolling over just over half the one-year loans, or 243 billion, and letting 199 billion euros flow out of the financial system.

The ECB has been keen to get money markets back on a more normal footing and to avoid banks becoming hooked on central bank money, but was wary of shocking markets with a sudden liquidity shortage.

So far, so good. Although longer-dated interbank interest rates continued rising on Thursday to new 9-1/2 month highs,  overnight rates were little changed and markets showed few signs of tension.

Analysts said it was a Goldilocks scenario all round.

“After today’s result the excess liquidity remains relatively abundant (over 100bn), and in the range that we had indicated as neither too high (which would have sent worrying signals on the health of European banks) nor too small (which would have put tremendous pressure on money market rates),” UniCredit analyst Luca Cazzulani said.

Inflation may not be at the forefront of worries about economy for now, but it’s certainly in the back of many investors’ minds. Not that anyone thinks price increases will be reinforced by the labor market, as per the old “wage-push” theory. A new report from the International Labor Organization showed that wage growth continued to decline around the world in 2008, falling to 1.4 percent last year from 4.3 percent in 2007. The UN group also suggested things have gotten worse this year.

The picture on wages is likely to get worse in 2009 – despite the beginning of a possible economic recovery.   Compared to the annual average of 2008, the real wages in the first quarter of 2009 fell in more than half of the 35 countries for which recent data is available.   The downward trend in wages raises some questions about the extent to which the consumption of workers and their families will be able to sustain aggregate demand for economic production once the effects of government rescue packages peter out.

This trend has not, however, succeeded in calming those spooked by unprecedented monetary and fiscal stimulus from governments and central banks around the world. Indeed, inflation-hedging is creating market niches all of its own. The Treasury, for instance, is expected to bring back 30-year Treasury Inflation Protected Securities, or TIPS, as part of its quarterly refunding announcement on Wednesday. Gorge Goncalves at Cantor Fitzgerald notes: