There were two key macro narratives Tuesday, one of which was the slowdown in China and the extent to which Xi’s “profound revolution” might turn out to be… well, more profound that Western investors initially figured.
The other “big” macro story revolved around comments from the ECB’s Robert Holzmann, who told Bloomberg that the central bank should consider transitioning from pandemic stimulus to regular stimulus.
And yes, you read that correctly.
Recall that the ECB is running two QE programs simultaneously. There’s “regular” QE and then there’s PEPP, the “flexible” pandemic facility. “Hawkish” in 2021 is when you suggest that you and your colleagues might discuss reducing (not halting, mind you) one of two QE programs at some point in the fairly near future.
Earlier this year, the ECB stepped up the pace of PEPP purchases amid concerns that bond yields might rise, thereby tightening financial conditions. That was in March. The language around the pace of PEPP buying (“significantly higher”) was retained through June. Then, last month, Christine Lagarde unveiled what I (aptly) described as “comically belabored” rates guidance designed to reinforce the ECB’s commitment to achieving its inflation goal following a policy review and the adoption of a symmetric target of 2% (an ostensible improvement compared to the old guidance, which was considered too weak and too vague).
That brings us to August’s flash read on inflation, out Tuesday. Core came in “scorching” (and the scare quotes are meant to convey humor in this case) at 1.6%. The headline gauge rose to 3%, above consensus (2.7%), and well above target, although I’m not sure there’s much that’s “symmetric” about the visual (below).
You might fairly suggest that between myriad distortions, well-documented signs of Japanification and the fact that 1.6% (on core) is still well below the ECB’s old target (to say nothing of the new one), the data is barely worth a mention. But it was mentioned. And the headlines touting the “highest inflation in a decade” served to accentuate Bloomberg’s Holzmann interview.
This is all manifestly ridiculous, from the overlapping QE programs (on top of NIRP) to the idea that 1.6% core inflation is “testing policy makers’ insistence that a post-crisis spike in cost pressures should prove temporary,” to quote one of at least a half-dozen different articles Bloomberg managed to publish on the subject Tuesday. Farce on top of farce was a Bloomberg Television segment during which a giant, floor-to-ceiling display showed the S&P down by a whole 0.07% with the headline “Holzmann Taper Tantrum” (or something of that nature).
Admittedly, there is a story here. Maybe several of them. Inflation in France and Italy rose to the highest in three and nine years, respectively, and euro yields jumped between six and 10bps. And Bloomberg is absolutely correct to suggest that it’ll be a big deal if the ECB announces its intention to slowly wind down PEPP.
But the whole spectacle only served to underscore just how far gone we really are. Holzmann’s remarks were hardly anything to panic about. “If enough people share my opinion, we will certainly advise the Executive Board to slow down purchases in the fourth quarter and more so in the first,” he went on to muse, while also noting that “we will spend as much as needed.” Bear in mind (and now I’m just repeating myself) the ECB is running what amounts to forever-QE in the “background.” Holzmann noted that APP (that’s “regular” QE) doesn’t require the same kind of flexibility as PEPP, which I assume just means it needn’t admit of dramatic deviations from the capital key. Additionally, he said the rates guidance should be “disentangled” from the guidance around asset purchases.
One worry for market participants is probably just that the ECB might start reducing stimulus at the “wrong” time, given the Delta variant and associated growth concerns. But this is the Afghanistan argument again — there’s never a “good” time.
In any event, it’s almost impossible for me to take this kind of engineered news seriously. In a separate interview, Klaas Knot suggested the ECB may wind down PEPP by March. “PEPP has a clearly delineated objective — repairing the damage that the coronavirus has inflicted on the inflation outlook,” he said. “The stars are much better aligned than they have been for a long time for the return of inflation back to 2%.”
Summing up Knot’s remarks in the linked article, Bloomberg wrote that if PEPP were wound down by March, it would allow the ECB to “return to pre-crisis discipline.”
Got that? “Pre-crisis discipline.” Where “discipline” means buying €20 billion in bonds per month in virtual perpetuity and keeping policy rates below zero for as long as it takes to hit a (moving) inflation target.
Just as that’s an odd definition of “discipline,” so too was a 0.4% decline in European equities an odd definition of a “tantrum.”
European stocks were still on pace for a seventh consecutive monthly gain (figure above).
The last time that happened: In 2013, around the same time core inflation was last at 1.5%.
