Firstly, price stability no longer meant stable prices and an increase of 2% per year became the new definition. Now in the US, average inflation targeting is the updated definition of price stability. In Europe, their definition of price stability was annual increases of “below, but close to 2%.” Now there are rumblings within the ECB that they are smitten with the Fed’s new regime. ECB member Francois Villeroy today said the word “symmetric” and “As a consequence we might be ready to accept inflation higher than 2% for some time.” Crackpot economics is now going global. Lower income earners living pay check to pay check, watch out.
The consequence of NIRP, ZIRP and QE as stated here a million times is the damage done to the earnings of banks. If banks are less profitable and get squeezed on loan margins, one would think they would lend less and small and medium sized businesses that don’t have access to the capital markets would get hurt the most. Well today, the Euro STOXX 600 bank stock index is now trading at a record low as of this writing. And the ECB wonders why their current policy is not working. By the way, it was 2014 when they went negative with rates.
To this I’ll say again, current monetary policy everywhere that hurts bank profits, including in the US, is no longer accommodative policy, it is restrictive instead.
Euro STOXX 600 bank stock index
The ECB via its TLTRO program is paying banks to take its money to then lend. In August, loans to businesses rose 7.1% y/o/y, the same pace seen in July. Household loans were up just 3% y/o/y, also the same pace seen in July. Money supply growth was 9.5%, below the estimate of up 10.1%. This compares to US money supply growth that has been running up by a historic 25%.
There was a big jump in the August industrial production print out of Singapore. It rose 13.9% m/o/m, well better than the estimate of up just 1.7%. Semi’s led the way with a 57% y/o/y gain. This points to a strong Q3 rebound in this key Asian city/state but it still remains to be seen when the pre Covid GDP levels will be achieved. The Straits index was up by .9% but is still down 23% year to date. I remain positive on Singapore stocks, particularly the reits.
Sentiment on the Italian economy got better in September with the index rising to 91.1 from 81.4. It was 98.8 in February, bottomed at 53.8 in May. Most of the contribution to the increase was from the services sector but manufacturing, construction and retail rose as well. After a huge spike in virus cases back in March and April, the numbers recently have been very low in Italy. Thanks to the ECB and political stability in the country, its 10 yr BTP yield is only at .89%, just off the lowest in a year. The euro is down slightly to the weakest in two months vs the dollar. I view this oversold rally in the dollar as only a temporary respite.