90 seconds at 9 am: ECB goes negative

IMF 'warns' China; ECB cuts base rates, sets negative deposit rate, avoids QE; eyes on US jobs; NZ$1 = US$0.851, TWI = 79.3

6th Jun 14, 7:28am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news about negative interest rates.

Firstly however, the IMF is getting less optimistic about China and its continued growth. It has downgraded next year's forecast to 7% from 7.3% which is lower than the official target of 7.5%. It is worried about their property market and the build-up of credit.

But bigger news today, this morning the European Central Bank made some significant changes to its policies. It reduced its main benchmark interest rate to 0.15%, down from 0.25%. It cut the interest rate on its marginal lending facility by 35 basis points to 0.4%. And it introduced a negative interest rate on its deposit facility of -0.1%.

It stopped short of large-scale asset purchases, or quantitative easing, as the British and Americans have done, but Draghi said more action would come if necessary. He says he is fighting "low inflation, a weak recovery and weak monetary and credit dynamics" and is now flinging cash at the sluggish euro zone economies, seeking to force banks to lend by imposing costs on them when they hold excess reserves at the ECB. That is what the negative interest rate is all about.

The Bank of England also reviewed their rate and decided not to change anything, as expected.

In the US, the number of Americans filing new claims for unemployment benefits rose last week, but the underlying trend continued to point to a firming labour market. Tomorrow's non-farm payrolls report is expected to show that 218,000 new jobs were created last month, down from the outsized burst in April, but more good news for their employment levels as more people start looking for jobs. But the new American jobs market is very different to the one left behind in 2007. The remaking of the American economy is quite remarkable.

Following the ECB moves, the stock market has charged ahead while the bond market saw yields slip a little. Benchmark UST 10yr yields are now 2.58%. The oil price took it all in its stride while gold took a jump by about US$10/oz.

On the exchange rate the NZD rose on the news. The NZ dollar is currently at 85.1 USc, at 91.1 AUc and the TWI is at 79.3.

If you want to catch up with all the changes from Friday, we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

25 Comments

by MortgageBelt | 6th Jun 14, 8:04am 1401998687

Of course, what happens in Europe has nothing to do with us. We are a Rockstar, we can hike interest rates .... Look at us! nZ is recession , deflation proof and

by Roelof | 6th Jun 14, 8:26am 1401999977

I'm guessing there might be 200-400 billion Euros of excess reserves held at the ECB.... A -ve interest rate will make that money RUN for a new home..... you would think.

I can already see the wave coming....

Just to show that the ECB isnt the only crazy central bank.... the FEd is also hard at work

http://research.stlouisfed.org/fred2/series/BOGMBASE

How on earth is this all going to end..????

by MortgageBelt | 6th Jun 14, 8:29am 1402000164

Obviously, the beginning of the end for NZ is a self-inflicted recession.

Then we can join the global party.

by Andrewj | 6th Jun 14, 8:33am 1402000381

First Time Unemployment Claims Remain At Record Lows – Is Implosion Next?

How can we explain a soft economy with high unemployment, but where hardly any workers are laid off each week? It suggests that employers are holding on to the workers they have with the skill sets they need because they cannot find those skills in the enormous pool of unemployed workers. The labor market of those with needed skills is tight. Those without those skills have been marginalized into a US underclass of “untouchables.”+

In this regard, the US economy appears to be stretched to its limit, if not beyond it. For an economy to maintain healthy growth it needs a growing population of workers who can afford to consume the goods and services the economy produces. Without that growth, stagnation is the best possible outcome. With the number of workers who cannot participate in economic growth increasing either because they have no jobs or only jobs with low pay, implosion may be inevitable, not just for the economy, but for the society at large.+

http://wallstreetexaminer.com/2014/06/first-time-unemployment-claims-re…

by Andrewj | 6th Jun 14, 8:48am 1402001335

Looks like a run on commodities to bonds.

Fekete

: Hyperdeflation means that the velocity of money-

circulation is getting ever lower, in fact lower than any given velocity,

however small. The important thing to note is that this is happening

regardless what the central bank does. It is the direct consequence of the

spontaneous money-flow from the commodity market to the bond

market. No amount of money-printing will change that. Hyperdeflation

takes place when resonance and breakdown occur during the phase when

commodity prices and interest rates are falling.

http://finviz.com/futures.ashx

by Andrewj | 6th Jun 14, 8:47am 1402001264

However, there is a causal relation between a falling interest rate structure and the erosion (destruction) of capital. The former is tantamount to rising bond values. The capital of an enterprise is a liability subject to periodic disbursements. It is listed in the liability column of the balance sheet, along with debt. This is the reason why, under a falling interest rate structure, the capital of all firms is subject to erosion, a fact stubbornly ignored by Keynesianism. Incredible as it may be, this ignorance (and not the gold standard per se) was the hidden underlying cause for the deflationary bias in the economy that Keynesianism was designed to overcompensate after World War I. The erosion of capital is vicious because it is well hidden and may become obvious only when it is already too late to do anything about it. The process of destruction of capital is a direct consequence of the falling interest rate structure. Those who argue that low interest rates are salutary to business confuse a low but stable interest rate structure with a falling one. The latter, to be sure, is lethal to business. http://www.professorfekete.com/articles/AEFBondsAndLogicPart2.pdf The thirty-three years old bull market in bonds has taken a terrible toll on bank capital. Virtually all banks have been rendered insolvent, with the rest to follow. Governments and central banks burn the midnight oil in trying to stonewall this fact, in vain. They pretend that insolvency is but a temporary liquidity problem. But this unprecedented banking crisis cannot be wished away so easily. Keynes is dead, and so is his idea that items can be shifted from the liability to the asset column of the balance We are already in a depression, masked by 5 unlimited money creation which is pouring oil on the fire of deflation. If 50+ percent youth unemployment does not indicate depression, then I don’t know what depression is. Bond purchases by the Fed lead to halving interest rates and halving them again and again. This is tantamount to destruction of capital as we mentioned a moment ago. Lower interest rates mean higher bond prices, which measure the increase of the burden of debt, the proverbial straw that breaks the back of the camel. Not only is the debt increasing exponentially in absolute terms; the burden of debt is increasing as well on the top of that : Hyperdeflation means that the velocity of money- circulation is getting ever lower, in fact lower than any given velocity, however small. The important thing to note is that this is happening regardless what the central bank does. It is the direct consequence of the spontaneous money-flow from the commodity market to the bond market. No amount of money-printing will change that. Hyperdeflation takes place when resonance and breakdown occur during the phase when 13 commodity prices and interest rates are falling. http://www.professorfekete.com/articles/AEFThirdDailyBellInterviewRev11…

by Roelof | 6th Jun 14, 10:27am 1402007223

Aj... I really struggle to make sense of feketes' point of view..

In the real world... commodities are used and consumed.... that money does not run to the bond mkt...????

Also... at a balance sheet level changing interest rates might affect the Capital value of any fixed term debt... or deposit.... BUT ...in a cashflow sense does it make any difference..??? I fail to see how it destroys capital...????

Most businesses borrow at a rate that works for them... and then pay down the debt..???

I much prefer Ray Dalios' "world view".... A much better Map. We are in a deleveraing phase, which can have varying outcomes..... BUT the transition phase is a lost decade ( or 2 ) .... ie. a period of stagnent growth

How do u understand fekete..???

Cheers Roelof

by Andrewj | 6th Jun 14, 10:39am 1402007980

http://www.zerohedge.com/news/guest-post-falling-interest-rates-destroy…

by steven | 6th Jun 14, 11:00am 1402009233

If he's thinking at all and not repeating his political mantra (feketke not andrewj). The Austrian view of the world seems to be 180Deg to everyone else. The "economic model is massaged to fit the political view, hence I think it often appears to make little or no sense.

He is right on overall deflation however, its coming and big time. The problem is essentials will stay and even get more expensive, that means non-essentials have to drop significantly in price and bubble territory housing is included in that.

regards.

by Andrewj | 6th Jun 14, 11:10am 1402009834

What we are seeing is commodity prices falling while our dollar strengthens.

Have a look

http://finviz.com/futures.ashx

http://www.marketwatch.com/investing/bond/10_year/charts

by steven | 6th Jun 14, 11:19am 1402010352

I watched a piece of the futures market last night, basically it was saying that a large quantity of speculators with serious amounts of $s have been forcing up the prices of many commodities for years, if not decades. The problem is what happens when these guys unwind? well a drop in commodity prices to their true value could well be the result.

I suppose my point is, do we really know what we are looking at? Im not so sure, in fact Im pretty sure that everything is a complex multi-layer dynamic mirage.....and we see lots of ppl doing (educated) guessing and nothing more.

regards

by Andrewj | 6th Jun 14, 11:22am 1402010525

Its not just that they are unwinding commodity positions, but that the money is pouring into bonds.

by steven | 6th Jun 14, 11:49am 1402012196

Yep, bonds are seen as the classic safe haven, I mean the EU looks like its about to deflate into a serious depression, running for cover makes sense when you know its one huge confidence game. Maybe its about time ppl realise that the "masters of the universe" are so far dis-connected from the real planet that what they do is a) parasitic and damaging b) we dont need them and shouldnt pay attention to them. Of course when you take away the financial and services sectors there isnt much left of the real economy is there?

The same piece seemed to suggest the amounts in the futures markets are mind boggingly large, many, many billions....(or maybe it was trillions). So these multi-billions rushing out and in are going to have a large effect.

regards

by Roelof | 6th Jun 14, 12:32pm 1402014750

how do u reconcile this graph with your view on deflation....????

http://research.stlouisfed.org/fred2/series/BASE/

Japan, China, EUR and USA..... All these Central Banks are debasing their money....

At a Political level.... the consensus is for money printing....QEing

With your call for deflation..... you are going against the 2 most powerful economic forces that there are... ie.. Govts. and central Banks..

I like the Austrian view... but I do struggle with understanding Feketes' view.

It does not look to me that commodities are in a deflationary tailspin..???

http://futures.tradingcharts.com/chart/RC/X

Looks more like a "new normal" of muted growth in the age of deleveraging...????

by Andrewj | 6th Jun 14, 12:38pm 1402015128

isn't deleveraging the destruction of capital?

by Roelof | 6th Jun 14, 1:06pm 1402016787

kind of....maybe... But , for me, the best way to look at it is as the reduction of debt to a sustainable level... Deleveraging happens when Income can no longer service debt repayments.

In my view, at the most basic level, capital formation is a function of savings... ie. deferred consumption... But in the world we live in Bank lending has become Capital.....

as dalio says... Debt ( credit) is a promise to deliver Money... ( it is an IOU note ) and there is alot more debt around than there is "money".... It is the underlying Money that represents the real Capital.

Dalio says a nice deleveraging needs 4 things :

debt reduction ( defaults/restructuring).... Austerity...... wealth transfer...and debt monetization.

Its all about reducing the debt/income ratio..... and depending on how the develeraging is managed..... Capital destruction be extreme.... or even ....not at all

I'm just parroting Ray Dalio here..... I just think he has the best "Map" for the current climate.

He also says the individual countries in the Eurozone are badly constrained because they can't print money... ... and the deleveraging there could be painful.... so yes.... the Eurozone is the most at risk of having an "ugly" deleveraging...

AND... deleveragings doNOT have to be deflationary..

by Andrewj | 6th Jun 14, 1:35pm 1402018550

But how do the Spanish to fix their youth unemployment, which is %50 of between 17 and 25 year olds? This will require Spain somehow gaining a competitive edge, how do they do that without deflation?

If Solid Energy lay off 300 hundred workers, will there be be alot of capital destruction? Solid energy is responding to low coal prices. low enough to make its mines uneconomic.

What makes them economic again and creates jobs with wage earners who can start spending in the economy again?

http://www.stuff.co.nz/business/industries/10126428/Over-300-miners-job…

by Roelof | 6th Jun 14, 3:24pm 1402025045

AJ... Spain has only those 4 choices in regard to deleveraging... ( only 3 choices... they cant print money)..

Thats the sad reality... when u borrow to much.... use debt to bring forward demand ..ie. consume today what you would normally consume tomorrow..... you eventually hit the wall.

For the sake of our youth... if I was spain... I would restructure debt.... I would leave the Eurozone..... I would practice austerity...( ie. reduce Govt and public sector..... and I would print money and distribute it to the bottom.... ie. universal payment/wage to all citzens.. ( abit like the big kahuna ) Hopefully the pain would be short ... in a short period of time...

In regards to economic activity.... I'd start from the bottom up....

As a Farmer... you would know that there are NO miracles for any young or old farmer that might have over borrowed and can no longer service debt.... All those associated with him feel the pain..

No debt = robustness, flexibility and choice...

too much debt = vulnerability and very little choice..

Surely.... the world has reached a point where GDP..and growth are less important than things like quality of life.... youth employment...

Where the financial sector goes back to its proper place of being a servant of the productive economy...

Spain is feeling so much pain.... in a way, it has nothing to lose in making some radical changes.... BUT... history shows... change dont come easy.

What would u do..?? if you were Spains Leader..

by Andrewj | 6th Jun 14, 5:14pm 1402031691

Roelof, my first thought was 'leave the euro', but that would be an unpopular move because what the Euro has done, is give the PIGS the spending power of the German Mark. That I think has been the biggest problem, those Southern countries got the northern countries spending power (and creditworthiness), through the Euro. Unfortunately following close behind was the cost structure.

I think either way, being in the Euro has no future for them, for now the Germans are enjoying the advantages of being an export powerhouse partly due to the low Euro, but I don't think that will extend to QE, when its to help the PIGS at Germany's expense. I don't know if you can do austerity in a country with Spain's history and not push the people over the edge. They already have problems with the Catalonia. They must have some good industry, my Nissan is made in Spain and we had a really good little Diesel car last time I was over, and it was made in Spain too. I agree with you, debt will have to be re structured but I don't see that as a risk free option.

I see much of the worlds problems as a result of Globalisation and Chinas currency manipulation. Even if Spain restructured and had an independent currency, would it have a standard of living anything like the last 30 years? It was complete madness for the USA and other Western countries to allow businesses to up sticks and take manufacturing and intellectual property to low wage economies, and then for them restructure so they had no tax liability. The midwest went through a stage where there was a auction every day of a factory closing. ( China shakes the world, and thenchallenge for the west. by Kinge)

I have a horrible feeling our turn is coming. China is adding 500,000 dairy cows a year to its milk herd and will eventually reach some form of sufficiency as far as milk supply goes. We are now also heavily dependent on China as the market for our meat, wool and pelts. Last year our exports of boned Sheep meat dropped %50 with a corresponding %50 increase in whole carcasses to China. In the last few years China has gone from taking a few tonnes of meat to over %50 of our sales. They take almost all our wool.

I agree a move to value the quality of live would make a huge difference, I'm not holding much hope on that one. Here in the States my friends tell me things are slipping backwards again. Wages are low many have been moved onto part time and there is a massive bubble in the share market. I remember a while back Stephen Hulme saying that he shouldn't be surprised to find our currency at parity with the US$, Im starting to think he may be a prophet of some kind.

Housing in Auckland would have been a much better bet if we hadn't added another 11 billion of debt to it in the last year.

Farming debt is creeping back up again too. Fonterra has put its money in Milk drying plants as has everyone else just in time for market saturation now we need cheese plants, why do we keep chasing rainbows?

NZ needs to reset its cost structure if it wants to rely on agriculture, to some how give it a first world standard of living, god knows we now have first world cost structures.

I have a friend who invests in housing in Hastings, he was telling me that in the 20 years he has owned rental property, many of his houses have never had a wage earner in them. Now he is telling me life on welfare is getting much harder, many of his tenants have unregistered and unwarranted cars, family living in the garage and are going without a lot of lifes basics. This in an area where thousands of seasonal workers are imported from the islands to pick fruit because of a labour shortage, every year. Thanks for the debate, I've enjoyed it. Aj

by Ralph | 6th Jun 14, 3:00pm 1402023630

Good question to think about.

It's a balance sheet liability but also part of working capital that creates economic activity. I'm sure Matt Nolan or Bernard could give us a good answer.

by scarfie | 6th Jun 14, 8:38pm 1402043880

Not only is the debt increasing exponentially in absolute

terms; the burden of debt is increasing as well on the top of that

Not sure if that conflicts or agrees with his previous articles, but is certainly more in line with (M.V)+i=P.Q.

by steven | 6th Jun 14, 11:14am 1402010041

Every economist with a lick of sense is terrified about the euro area’s slide toward deflation, but the orthodox are surprised to hear that it’s a problem.

http://krugman.blogs.nytimes.com/2014/06/04/very-serious-europeans-2/?m…

by Andrewj | 6th Jun 14, 11:20am 1402010407

The problem is that QE would be at the expense of Germany and to the advantage of the Pigs. I don't think Merkel will play that game some how.

Deflation will make the EU competitive over time. In the short term it looks like China is going to have a lot of surplus supply, so it will export deflation.

by steven | 6th Jun 14, 12:04pm 1402013059

I agree that is how Germany sees it, inflation not wanted here.

"EU competitive", well you cant see the EU as one entity IMHO and after 6 years time is running out for teh PIIGS and hence the EU.

There is 'advantage" and there is of the equivelent of not cutting off your legs. If the PIGGS cannot become competitive via a currency devalue that only leaves one thing, massive wage deflation and that comes via massive domestic un-employment and its already at close to crisis levels.

Yes there is (or was) large over-capacity and with debt being so high I cant see the prices of goods rising, or ppl buying more, hence yes they have been exporting deflation. However to get their 7~10% growth I think they have bubbled themselves internally in property and it looks a mess., squashed both ways.

Looking uglier and uglier...

regards

by Ralph | 6th Jun 14, 12:43pm 1402015439

That NY Times graphic is quite something David.

The opportunites in pet grooming and nail salons have clearly gone through the roof- LOL!