On Thursday, the ECB’s Ewald Nowotny told Austrian magazine Trend that policymakers in Europe are now actively debating whether it’s advisable to continue down the road to policy normalization.
“Due to the cooling down, it’s being debated if this normalization should even continue”, he said, adding that if you ask him, the normalization push “should have started already last year”.
Right. And as we and plenty of others have gently (or not-so-gently, depending on which “others” you’re talking about) pointed out, the trend in the data across the pond clearly indicates that the ECB likely missed its window.
That’s not to downplay or otherwise take anything away from Mario Draghi, whose penchant for deftly navigating choppy waters is legendary. Indeed, it’s nothing short of a miracle that he’s managed to hold it together considering what it is he’s tasked with doing (i.e., coordinating monetary policy for a disparate set of economies each with their own sometimes widely divergent domestic priorities and political inclinations).
Obligatory ECB Post Alert: Draghi Postmortem
ECB Ends QE And, Critically, Enhances Forward Guidance Around Reinvestments
Draghi’s talents notwithstanding, the fact is that the European economy appears to be on the verge of a recession. Italy is already in a downturn and Germany narrowly averted a similar fate in Q4.
The EC recently delivered sharp, across-the-board cuts to its forecasts and the incoming data continues to suggest that “stagnation” is about the “best” outcome anyone can hope for.
At the January meeting (see first linked post above), the ECB acknowledged the downside risks and the minutes from that pow wow (released Thursday), suggested that policymakers are feeling a sense of urgency when it comes to deciding whether another round of TLTROs is in order. Here’s the key excerpt:
A number of remarks were made regarding available monetary policy tools in the domain of longer-term liquidity provision. Any potential new operations should reflect the monetary policy objectives to be achieved. While any decisions in this respect should not be taken too hastily, the technical analyses required to prepare policy options for future liquidity operations needed to proceed swiftly.
In addition to that, there are obviously questions about the relative wisdom of ceasing net asset purchases starting last month and it now seems pretty clear that the first rate hike will need to be pushed out to 2020.
With all of that in mind, BofAML’s Barnaby Martin is out with the latest edition of his European credit investor survey and (surprise!) high grade investors now list “Global Recession” as their biggest worry.
“Investors’ biggest worry has sharply pivoted to Global Recession (30%), the strongest consensus for any single worry since Jun-17 when Credit Bubbles was at 33%”, Martin writes, adding that “what February’s survey also reveals is that many risks are now hugely out of consensus [as] not a single credit investor is worried about yields rising or inflation climbing, and only 2% of investors now say that Brexit is their biggest concern.”
Amusingly, some 40% of those surveyed said “the key to getting the Eurozone out of its current growth funk is via China stimulus supporting German exports.”
That underscores just how important China’s credit impulse is when it comes to stimulating global growth. One supposes those polled in BofAML’s survey were pleased with last months credit data, which showed Beijing unleashed a 4.64 trillion yuan tidal wave of liquidity ahead of the holiday.
A 4.64 Trillion Yuan Tidal Wave Of Credit Growth — Let’s Discuss
Of course the effectiveness of China’s easing depends heavily on whether the monetary policy transmission channel can be “unclogged”, something we’ve spent more time talking about than I would ideally like given how tedious the discussion is for most readers.
“There’s no denying that China is serious about fighting their growth wobbles”, Martin goes on to say, before referencing January’s credit data and noting that as a percentage of GDP, last month’s TSF figure came in at 5.5%, “the biggest monthly liquidity injection ever registered.”
Drilling down further into the survey, “Global Recession” also topped the worries list for high yield investors, following by “Quantitative Failure” and, of course, the trade war.
Notably, credit investors appeared to think that a new round of TLTROs might already be priced into spreads.
Meanwhile, fully 50% of € high yield investors now believe Europe will fall into a recession. The number is far lower for IG (17%).
In any case, the takeaway for central banks from these types of surveys should be that caution is warranted given how quickly expectations can turn into reality.
As we never tire of reminding folks, part of the reason why what happened in December was so dangerous was that past a certain point, deteriorating sentiment begins to manifest itself in real economic outcomes which are then cited as “evidence” to justify that same souring sentiment, in a self-referential doom loop.
That circular dynamic is the main reason why policymakers should be wary when “Global Recession” starts popping up on investors’ list of biggest concerns.
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