The ‘Normalisation’ narrative – that is the increase in interest rates and the unwinding of central bank balance sheets – is gaining speed. Yesterday’s minutes released by the Federal Reserve from their May meeting is littered with references such as, ‘monetary policy normalization’ and ‘normalization principles’.
As I mentioned in my last update, this narrative began circulating from the Bank for International Settlements in April. Central banks are preparing to steadily withdraw monetary ‘accommodation’, evidenced by rising inflation and the false fundamentals showing a continued rise in employment. These two indicators, along with oil prices, are the primary figures used to justify a ‘growing economy’.
Economic data such as increased consumer debt, a rise in government borrowing, stagnating retail sales and flat GDP numbers are not being taken seriously. The Federal Reserve view current GDP quarter one estimates as ‘transitory’, and from their own words have no intention of slowing down their course of rate hikes and plans to reduce their over $4 trillion balance sheet.
Once interest rate rises start to feed into the economy is when the economic slowdown that is already here will begin to branch out into the mainstream.
- In recent days, officials have been indicating that the balance sheet will be unwound, likely starting later in the year, raising questions from investors about how the process will work and what impact it will have.
- According to minutes released Wednesday from the Federal Open Market Committee meeting earlier this month, the central bank sees a system where it will announce cap limits on how much it will allow to roll off each month without reinvesting. Any amount it receives in repayments that exceeds the cap limit will be reinvested.
- The process is similar to the tapering it did of the monthly bond-buying program known as quantitative easing.
- “Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the committee to take another step in removing some policy accommodation,” the minutes said in a statement that is Fed vernacular for a rate hike ahead.
- Last week was a rather crazy one for the news feeds, with cyber attacks and “Comey memos” and a host of other wild mayhem, it may have been difficult for many people to keep track of it all. That said, there was one event that I think went partly under the radar, and I think it is an important signal for anyone concerned with the ongoing process of economic collapse in the U.S.
- President Donald Trump’s budget director suggested Wednesday that the government’s borrowing limit may need to be raised earlier than originally anticipated, citing “slower-than-expected” tax receipts.
- The latest monthly budget report from the Treasury shows receipts are up almost 1% for the fiscal year to date. The year before, receipts were up about 1.2% through April, and the year before that, nearly 9%.
- Mnuchin, appearing at a separate hearing on Capitol Hill, said he wanted lawmakers to raise the debt ceiling “before you leave for the summer.” That means before July 28, when recess begins.
- Mulvaney’s comment suggests the Treasury doesn’t have as much money coming in as it thought it would, meaning it would need borrowing power earlier. As the Bipartisan Policy Center has noted, once extraordinary measures are exhausted, the Treasury will only be able to pay its bills by using incoming tax receipts.
- Mario Draghi is leading a push to stamp out any speculation that the European Central Bank might raise interest rates before it ends quantitative easing.
- Speaking in Madrid, the ECB president reaffirmed the “logic” of the current sequencing, arguing that the unwarranted side effects of negative rates are likely to be less of a problem than those potentially produced by asset purchases. Along with his deputy Vitor Constancio and Executive Board member Peter Praet, he urged investors waiting for a signal on the path of policy normalization to be patient, signaling that June might not be the time for big decisions.
- Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble believe it is high time for a German to lead the European Central Bank, and they have already picked their favorite candidate.
- Handelsblatt learned that the German government is working on a plan in which Jens Weidmann, the head of the German central bank, or Bundesbank, would succeed ECB President Mario Draghi when the Italian’s term expires in 2019. Der Spiegel newsmagazine also reported the story this weekend.
- Government borrowing was at its highest April level for three years, according to the latest figures from the Office for National Statistics (ONS).
- Public sector net borrowing, excluding public sector banks, was £10.4bn last month, up by £1.2bn from April 2016.
- Public sector net debt was £1.72tn, equivalent to 86% of GDP, an increase of £114bn on April 2016.
- In his fiscal 2018 budget proposal, Trump asked Congress for $3.6 trillion in spending cuts that would mean steep reductions in food stamps, Medicaid health insurance payments, disability benefits, low-income housing assistance and block grants that fund meals-on-wheels for the elderly.
- The plan found little favor in Congress, even among Republican lawmakers from districts and states that gave Trump wide margins in the November election, and it had Democrats talking about a deal on spending that would exclude the White House.
- “Who hit the breaks?” The answer: the US consumer, the driver behind 70% of US GDP, officially tapped out.
- In fact, it was almost as if US consumers were hit by a perfect storm of adverse events in late 2016 and early 2017, just as GDP was on the verge of its first pre-recessionary contraction in years, and just as the S&P rose to new all time highs to distract from what is emerging as an imminent US recession.
- Here’s the bottom line: unless there is a sharp rebound in loan growth in the next 3-6 months – whether due to greater demand or easier supply – this most accurate of leading economic indicators guarantees that a recession is now inevitable. How accurate: every single time C&I loan peaked, a US recession follow. We doubt this time will be different.
- Total debt held by US household reached $12.73 trillion in the first quarter of 2017, finally surpassing its $12.68 trillion peak reached during the recession in 2008 according to the NY Fed’s latest quarterly report on household debt. This marked a $479 billion increase from a year ago, and up $149 billion from Q4 2016 after 11 consecutive quarters of growth since the deleveraging period immediately following the Great Recession.
Wolf Street: ECB Tapering May Trigger “Disorderly Restructuring” of Italian Debt, Return to National Currency
- Here’s the staggering scale of the Italian government’s dependence on the ECB’s bond purchases, according to a new report by Astellon Capital: Since 2008, 88% of government debt net issuance has been acquired by the ECB and Italian Banks. At current government debt net issuance rates and announced QE levels, the ECB will have been responsible for financing 100% of Italy’s deficits from 2014 to 2019.
- Last month, the size of the balance sheet of the ECB surpassed that of any other central bank: At €4.17 trillion, the ECB’s assets have soared to 38.8% of Eurozone GDP.
- Robert Kaplan, the president of the Dallas Fed, said he wasn’t worried about the strength of the economy or the outlook for inflation and said he expected the U.S. central bank to raise short-term interest rates twice more this year.
- “I believe that these recent readings are likely not indicative of a weakening trend,” Kaplan said.
- Kaplan said two more rate hikes was “an appropriate baseline case.” But he said he could be persuaded to support a faster or slower pace of rate hikes depending on the economy’s performance.