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Euro Slides On Goldman European Forecast Cut, Expectation Of 25 bps ECB Rate Drop
With an increasing number of market participants expecting a rate cut from the ECB at next week's May meeting, Goldman Sachs is piling on in a considerably less exuberant manner than the crash lower in peripheral bond yields would suggest. EURUSD reversed its gains very rapidly as Goldman slashed its growth forecast from -0.5% to -0.7%, expects a 25bps cut next week, but notes that this is "largely cosmetic" with few real implications for the economy. Critically, they also remind us that Draghi and his fellow ECB'ers have been increasingly stressing the limits of what the ECB can do - making it clear that it is local governments that must create conditions for the recapitalization of their banks. The point is, Goldman, like us, recognizes this is an insolvency (capital) issue not a liquidity issue, and it seems the ECB also knows that now. European stocks faded modestly on this as EUR sold off and peripheral bond spreads have ben leaking wider since yesterday as perhaps the reality is far less risk-supportive (via bond purchases?) than many had hoped.
Via Goldman Sachs,
After the disappointing string of economic data over the past couple of weeks, we think the conditions set out by the ECB for a further easing in rates have now been fulfilled. We therefore expect a 25bp cut in the main refinancing rate at the May meeting, but no change to the deposit rate. We continue to view the rate cut as largely 'cosmetic', with few implications for the economy. The ECB still has room for manoeuvre with its non-standard credit easing measures. We also revise down our 2013 growth forecast for the Euro area, to -0.7% from -0.5% previously.
Disappointing April business surveys
The prepared statement from the ECB’s April meeting reflected a rising concern on the Governing Council about the economic outlook. In the opening paragraph, the GC states that “In the coming weeks, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.” During the Q&A part of the press conference, President Draghi then added “…we will assess all incoming data and stand ready to act.” Similar comments by other GC members in the following weeks have also clearly signalled, in our view, that a further weakening in the data would imply a rate cut.
The most recent data at the time were indeed indicating that the weakness was spreading beyond the peripheral countries and was affecting “countries in which fragmentation is not an issue”. The results of the April business surveys would therefore be of great importance for the ECB in deciding on its next actions. Given that the results of the surveys have been fairly disappointing, we now think the necessary conditions for a rate cut, as signalled by the ECB, have been fulfilled. Although the composite Euro area PMI was flat on the month and the rebound in the French PMIs was a genuine positive surprise, the overall balance of the April business surveys nonetheless highlights the risks to the ECB’s (and our) main scenario of a “gradual recovery” in the second half of this year.
A 'cosmetic' rate cut
As we have argued on several occasions, a cut in the MRO rate would have little impact on the Euro area economy. Funding rates for core Euro area banks are already close to zero. Only if the deposit rate were also cut would funding costs for core banks ease. As far as peripheral banks are concerned, the impaired transmission mechanism implies that the rate cut will not be passed on and that even if it is financial conditions for the private sector in the periphery would remain very tight.
Moreover, there is also a 'cost' that comes with a rate cut. We expect the deposit rate to be left unchanged owing to the “potential negative unintended consequences”, so the narrowing of the corridor between the MRO rate and the deposit rate would also lead to further disintermediation between banks. As peripheral banks would be able to refinance themselves more cheaply at the ECB, there would be less interaction with other banks. While it is not easy to assess the precise 'cost' of disintermediation, it is nonetheless relevant given that we think the positive effect of a rate cut is marginal.
Non-standard measures and the role of governments
Reducing funding costs in the periphery, despite signs of weakness in the core, should remain the ECB’s main focus. As Mr Draghi has said repeatedly, the Governing Council is thinking “360 degrees” on this topic. But Mr Draghi and other GC members have also increasingly stressed the limits of what the ECB can do on this front. If, for example, it is a lack of capital that is holding banks back from lending, there is not much the ECB can do. Rather, it is governments that would need to create the conditions for a recapitalisation of banks. We would expect the ECB’s demand for government actions to become even louder after a rate cut.
We downgrade our Euro area forecast
On the back of the latest data, we also revise down our Euro area growth forecast for this year, to -0.7% from -0.5% previously. The revision mainly related to growth in the first half of this year; we continue to expect a moderate acceleration in growth in the second half. More specifically, we now expect Euro area GDP to decline by -0.2%qoq in Q1 and then by 0.1%qoq in Q2 before stabilising in Q3 and then increasing slightly by the end of the year. The revisions are concentrated in Germany and Italy. In Germany, the rebound at the beginning of the year after the decline in Q4 last year, seems to be less forceful than we initially expected. Moreover, the latest business surveys out of Germany also suggest that the (moderate) momentum at the beginning of the year has started to slow again in Q2. That said, the fundamental picture remains sound, and we still expect a more lively rebound in activity during the second half.
As for the economic situation in Italy, we think both the credit crunch and political uncertainty are weighing on the economy more than expected. We continue to forecast a stabilisation in activity by the end of the year. This forecast, however, depends crucially on further non-standard measures from the ECB and/or the Italian government, which would improve the corporate sector's access to bank lending.
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Cant they just go ahead and make rates negative?
They should pay me to take out a loan. I would then add to 'my precious' stack :)
Many rates are already negative. Shit, look at some of the rates on U.S. TIPS, many negative there already. "Bail-in" bitches! Yet, Stewart does a hit piece full of mis-information on gold. Showing your true alliances John?
Euro area yield curve:
http://www.ecb.int/stats/money/yc/html/index.en.html
Short term rates still @1%. Many have speculated that the Euro area has the ability to reduce overnight rates as yields decline, but so far, they've avoided reality.
Some bund yeilds are negative. This is not about liquidity, this is about solvency and the quality (true price) of the underlying assets and collateral.
http://www.zerohedge.com/news/2013-03-26/bund-yields-negative-first-time...
My bad, rates are .75%. They can drastically lower these rates to match 3 month treasury bill yields. Part of the problem with the Euro area has been a reluctance to lower rates where warranted, and the result has been serious faillures in the banking sector. They would prefer that financial hits be taken by the weakest members solely to keep up appearances without decreasing rates at the short end.
I think Bernanke is doing correctly compared to them.
Will only accelerate the death of the euro and dollar. bring it.
Maybe the Euro is correcting for mistakes at the ECB.
Edit: They haven't had a housing bubble collapse in Northern Europe, or are in the process of watching the declines, whereas Spain has seen its housing collapse well in advance of latest banking sector problems.
This is not a liquidity issue? How could that be?
Is a lively rebound different than a dead cat bounce?
Why cut rates when the companies and people can't profit from it to ease their loans or get a loan at a descent rate?
And low rates doesn't do shit about unemployment as long as there's nothing done about the bureaucracy and high cost and taxes for companies and startups.
Unemployment is skyrockting these last 2 months in Europe. All of Europe, south and west.
You guys are all missing the point. The unemployment in Spain and Italy are bullish. Because people at their wits end grasping at anything they can is what the economy needs. So if that is happening in the US then Europe is on the verge of Utopia.
"The growing underground economy may be helping to prevent the real economy from sinking further, according to analysts.
The shadow economy is a system composed of those who can't find a full-time or regular job. Workers turn to anything that pays them under the table, with no income reported and no taxes paid — especially with an uneven job picture.
"I think the underground economy is quite big in the U.S.," said Alexandre Padilla, associate professor of economics at Metropolitan State University of Denver. "Whether it's using undocumented workers or those here legally, it's pretty large."
"You normally see underground economies in places like Brazil or in southern Europe," said Laura Gonzalez, professor of personal finance at Fordham University. "But with the job situation and the uncertainty in the economy, it's not all the surprising to have it growing here in the United States."
Estimates are that underground activity last year totaled as much as $2 trillion, according to a study by Edgar Feige, an economist at the University of Wisconsin-Madison. "
When fraud is the status quo in the "official" economy, people still do whatever it takes to survive and take their business elsewhere. I remain long black markets an sharecropping in "right-to-work" states.
I just find it funny that cnbc is long black markets too. I want to see isani spin it.
the rising trendline is presenting a challenge for the bulls. stocks now must go up everyday or they will drop below. after that obliteration on tuesday, the entire depth of the bid book is gone. we drop below that line (currently at 1579), stocks drop far....and fast.
85 billion per month in direct monetization (that we know of), plenty of "bid" under everything. As for collateral, not so much.
"we also revise down our Euro area growth forecast for this year, to -0.7% from -0.5% previously."
So we're looking for -1.4 from -1.0 based on that number, so the ECB rate should be at zero by September, just in time for Angie to pack it in.
Perfect..
It was a sum of many factors, including today's Spanish new record unemployment print & U.S. claims.
We're fucked here in Yurope.
HALP!!
But the US GDP Q1 GDP is forecast to grow 3.2%. Release date is tomorrow.
http://www.marketwatch.com/Economy-Politics/Calendars/Economic
LMFAO!!!
Someone missed a spot.
Must.....Push String....HARDER.....
That's the annualised - quarterly change x 4. Still, tomorrow could be a miss, tho.
Goldman may recognize that this is an insolvency issue, but they surely are NOT going to do or say anything to put an end to MOAR QE!
O RLY? Another rate cut in a long string of rate cuts over years isn't going to do shit 'for the economy'? Well tickle me with a buggy whip!!
Second posting, just want get feedback:
Not real sure how to put this...
If the USD burns, then would that not leave the TB's in a jam and rates INCREASE, and Gold would also debase?
I would think what is going to happen is ALL currencies would tank, therefore, Gold and all commodities priced in a currency would follow suit and tank. The difference is Gold would at least have some value, and currency would be completely worthless. All paper investments would trend to zero, in that case. Lastly, the world would become barter town. Problem being how do you value the PM's henceforth? In other commodities?
When the SHTF, it will be skills and real things (water, food, nails, hammers, booze, tobacco, etc) that would have the ultimate value, no?
Reason I say this, and it may be simplistic, as I am no high financier, but once the currency burns, there will be worldwide panic/chaos, and the govts will have no power to institue a 'replacement' currency, as they will be fighting for their very lives, so will we. It wont be until the chaos dies down, how long that will take is anyone's guess, for some rule to go into effect. My guess is currency based on LAND??? After all land is the most productive resource, along with water...so land with water will be the highest premium, which brings me to Agenda 21...NDAA, etc...strip rights and guns first, then the PTB can just TAKE OVER. Fuedalsim all over again, and the darkest of ages, as so many skills have been lost since the industrial revolution came about. Manual skills, growing skills, LIFE SKILLS...sans a select few who practice it now!
Just my two common cents is all...out! Please let me know what you think, inquiring minds would like to know.
Love and regards from Sgt. Unix Crust
That's why there's such a war going on right now....'fractional reserve central bankster money masters' can ONLY live off the toil and sweat of others....they have NO means for their own survival other than trying to find a way to parasite. They sense their old game is now over, and not sure how they can continue leeching to support themselves. So thusly we get $120 billion/month QE....they don't know what else to do.
Look to Brazil, Argentina, India etc. These currencies have burned several times in the last 20 years. Not so much bartertwown as local corruption and local exchanges do more business and the "official" market. A new currency is introduced, devalued, rinse repeat. The oligarchs stay the same.
Thanks for the replies...however those currencies are not the worlds reserve currency...that would make things a bit different would it not?
So long as the dollar remains the reserve currency anyway.
According to Credit Suisse:
Money Matters: FOMC Preview - Tapering versus Tightening
- The FOMC next meets on April 30-May 1, and we expect no significant policy changes to be announced at that time. Even if the Committee had been entertaining notions at its March 19-20 meeting of slowing its asset purchases anytime soon, the disappointing economic data released since then probably have shelved such plans for several months.
- In our view, an opportunity to scale back the asset buying may not come until later this year perhaps in September. For now, we expect the size of the Fed's monthly purchases to remain at $85bn ($40bn MBS, $45bn Treasuries).
- Looking forward, we maintain that any future decrease in the size of QE3 purchases would not be a monetary policy tightening, although the markets may initially react as though it were.
- Moreover, even if the Fed were to eventually end QE3 sometime in 2014 and start hiking interest rates in 2015 (or later), we believe monetary policy still will remain very accommodative for many years.
- The risk is that even if business cycle conditions were to allow the Fed eventually to firm up its policy stance, subsequent economic performance (or budgetary strains or financial fragilities) would force renewed easing long before the Fed reached an elusive "longer run" neutral funds rate target.
- Monetary Policy Review/Preview
- Beige Book (released on April 17).
- Fed Balance Sheet Update
- The Fed's MBS portfolio surged $55bn to $1.1tr in the week ended April 17.
- Excess reserves total $1.8tr, $159bn above their previous peak in July 2011.
- Money Supply Update
- M1 posted its largest weekly decline since just after the 2001 terrorist attacks.
- A $63bn pop in savings accounts at commercial banks limited M2's decline.
- Bank Balance Sheet Update
- Adjusted for a 2010 accounting change, commercial bank loans outstanding yesterday (April 23) are still some 5% below the Q4 2008 average.
- Cash assets held by domestically chartered banks have jumped by more so far this year than have cash assets at branches of foreign banks in the US.
I think we are in for a long slow slog.....0% growth more or less....and those who get debt free wins....those who get more...like student loans will lose as there will not be a lot of new high paying jobs....maybe a new app or tow...a shiney new phone...but as for a new mine,nuclear power plant, or dam being built...no way....we are the Japanese now...and in time the world will wean themslves from us too...
Euro dropping, eh? Quick, Tyler where's that journalist you sent in to question Mario Draghi at the last ECB press conference? No, you couldn't heckle from the sidelines like you usually do! You had to send that guy and he asked the second last question of the press conference...you remember...the one that elicted the "there's no Plan B" response from Draghi. And that started a 200 pip-plus rally in the Euro, a currency that really is little better than used toilet paper at the best of times, given the chaotic "grouping" (let's not dignify it by calling it a "union") that backs it. Crushed my Euro shorts that question did. Thanks a million, Tyler.
I, for one, am uncomfortable that GS is apparently on the same side of a trade as me. I'm starting to think I better get out of my EURUSD short position.