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By GEOFFREY SMITH
with CARLO BOFFA, BEN MUNSTER and IZABELLA KAMINSKA
— UK Treasury Committee to scrutinize appointment of former Roubini economist Megan Greene to the BoE.
— There’s a rare sighting of former Credit Suisse analyst Zoltan Pozsar, who shares his latest thoughts on de-dollarization.
— The world, and specifically former ECB president Mario Draghi, remembers the late Silvio Berlusconi.
ECB 3.75% ⇡ — BOE 4.5% ⇡ — FED 5.35% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.65%⇣— CBR 7.5% ⇣ — BOC 4.75% ⇡ SARB 8.25% ⇡
Good morning, inflationistas! We tried to think of an alternative lead to the U.S. CPI later but, what the heck, why should we be the only original ones?
It’s the number on everyone’s minds, the last potential hurdle to the Federal Reserve announcing a skip, or a pause (yes, there really are economists who will try to tell you they’re two different things) when it announces its interest rate decisions on Wednesday. As with Europe, the consensus is for a big drop in the headline number to 4.1 percent from 4.9 percent, thanks to base effects in energy prices. A much smaller drop is expected in core price inflation, from 5.5 percent to 5.3 percent, despite a still-chunky 0.4 percent rise on the month.
The Fed starts its two-day meeting today, and the bond market is going into the meeting in a relaxed — dare one say, complacent — mood, with the 3- and 6-month T-bill yields hitting their lowest in nearly a month on Monday as oil prices slid and the Treasury’s auctions passed without a hiccup.
PROGRAMING NOTE: Our senior finance editor, Izabella Kaminska, will be interviewing the Bank of England’s Jon Cunliffe on Thursday as part of POLITICO’S Global Tech Day. She’ll be sure to get an update on whether he still thinks there’s a 7 out of 10 chance that a digital pound will be adopted. You can sign up to view the livestream here.
Send tips to [email protected], [email protected], [email protected], [email protected]. Tweet us, too: @Geoffreytsmith, @JohannaTreeck, @Ben_Munster, @izakaminska
— US May CPI 2.30 p.m.
— BoE nominee Megan Greene faces Treasury Committee at 10:15 local time.
— German ZEW and UK labor market data.
US CPI dominates: Most analysts are expecting the Fed to break a sequence of 10 straight rate hikes, but rate futures still price in a small chance of another 25 percentage points coming on Wednesday. Standard Chartered’s Steven Englander reckons that the Fed will pause, leaving the option to return to hiking at July’s meeting. “In our view, the set of possible dissenters are Bowman, Logan and Waller, but we doubt that more than one of these will dissent.” ING analysts are more alert to the risk of a hike, warning in a daily note on Monday of “tight labor markets and core inflation stubbornly above 4 percent.” ING’s house view remains that U.S. disinflation becomes much more obvious in the third quarter with substantial Fed cuts set for the fourth quarter.
Gathering clouds: Brace for a bad ZEW number in Germany. Its sentiment index, which is compiled by economists rather than businessmen, is set to fall to its lowest since January, after a dismal round of production, orders and retail sales data for April. Consensus is for an index reading of -12.7. There are also some final CPI numbers for May in Germany and Spain.
More wage pressure: The U.K. will publish its latest labor market report, where consensus is for an acceleration in average earnings in April, giving further support to the belief that the BoE is in a league of its own when it comes to overshooting inflation. If confirmed, the numbers will pile the pressure on Andrew Bailey & co. to keep hiking until something breaks. The 10-year Gilt yield finished only 25 percentage points short of its October peak on Monday. .
GREENING THE BOE: The Treasury Committee is set to hold a pre-commencement hearing scrutinizing the appointment of Megan Greene to the Bank of England’s Monetary Policy Committee at 10.15 a.m. local time today. Greene, who was a senior fellow at Brown University, global chief economist at the Kroll Institute and regular contributor to the Financial Times, is perceived as a “centrist” economist with a Remainer slant, who is likely to tilt the MPC a little more hawkishly (although, to be honest, that says more about the departing arch-dove Silvana Tenreyro than it does about Greene).
Fintwit doyenne: Greene rose to prominence as an economist during the eurozone debt crisis, much of which she spent at the doomsday cult better known as Roubini Global Economics. Notable for her measured commentary on the Greek debt crisis, and for her skillful use of media to amplify her messages, she has had an active presence in the so-called “fintwit” community on Twitter since the early days, under the handle @economistmeg. If she’s allowed to use it, her social media nous could come in handy at the Bank in light of recent social media-fueled instability and general communication fails by the likes of Governor Andrew Bailey.
Active Tweeter: Greene by name, red by inclination? Greene’s definitely in the ‘Andy Haldane’ progressive and innovative thinking camp. As the Telegraph noted at the weekend, she seems passionate about pressing hard on achieving net zero, and thinks the BoE should introduce a system of “dual interest rates” to “give banks preferential (negative) rates if they direct the funds toward green investments.” Former cabinet minister David Frost is not amused. He told the paper: “It is deeply troubling that a prospective member of the Monetary Policy Committee should have advocated such a collectivist and socialist approach.” Ouch.
Dual rates: Greene had advocated for the dual interest rate scheme two years earlier, but more as a way to take out the zero lower bound for interest rates, in the way that the ECB did with its tiering system for reserve remuneration and its TLTRO conditions. Given the way inflation has gone since then, it’s perhaps for the best that she didn’t get to try it out at the time. But even so, it’s only fair to point out that one can be to the left of Frost without actually being Pol Pot.
Mystic Meg? In February 2023, Greene argued in an FT oped that quantitative easing would be much harder to unwind than appreciated, likening the situation to the Eagles’ hit “Hotel California”, where you can check out any time you like, but you can never leave. “If every bank tries to transform their assets into cash simultaneously, there will inevitably be a shortage, as happened in the US repo market in 2019,” she warned, adding that “banks make greater claims on the system’s liquidity during QT, which may continue until there is a market blow-up.” The fact the first blowup occurred the following month, and in California, seems to confirm there might be something otherworldly about Meg.
EX UNO PLURES: Ever since news broke that the world’s premier liquidity and plumbing analyst, Zoltan Pozsar, had left Credit Suisse, market tongues have been wagging with speculation about where he might end up next. We got a clue of what’s to come in a rare sighting of a post Credit Suisse Zoltan interview buried in the May 24th 417-page annual report with independent journalist Niko Jilch and fund manager Ronnie Stoferle. You can read it here.
De-dollarizaton not nigh, but soon: Pozsar tells the duo “the dollar is not going away overnight, and it’s going to still be a reserve currency and used for invoicing and trade and all that in parts of the world… but there will be other parts of the world that are not going to rely on the dollar as much.” He dismisses arguments that the renminbi isn’t ready to intrude on dollar turf because of its current account surpluses by reminding the duo that the dollar rose to prominence in similar circumstances. “The US became a reserve currency with a current account surplus. It’s just that things later changed and then they turned to running a deficit,” he notes, adding China will rely on swap lines to pump renminbi liquidity into the system.
All about the geopolitics: The good news for the eurozone is that the single currency could feature more prominently in the multipolar order, according to Pozsar. “Europe is a great prize in this “great game” of the 21st century, which China is going to be playing on the Eurasian landmass and in Africa and the Middle East. Where the gravitational pull of things will fall, Europe going forward is a big question in terms of the euro’s status as a reserve currency and whether their share is going to go up or down,” he said.
Supply chains are payment chains in reverse: Pozsar continues to frame his outlook around the idea that supply chains along the lines of political allegiance will determine the alignment of a nation’s currency. But when it comes to the eurozone, nothing’s sure yet. “I think Europe is a question mark in there. It’s going to be fought over.” Morning Central Banker understands Zoltan fans won’t have to wait too much longer for info on what he’s up to next. About 17 days and counting if we understand correctly.
CBDC PRO AND CONS: Influential Brussels think tank Bruegel will consider the use cases for a central bank-backed digital currency in a debate today, reports Bjarke on Morning Financial Services. Digital euro enthusiasts will be disappointed to see no one from the European Central Bank or Commission on the panel, as the EU proposal for the virtual cash draws closer. Participants will instead listen to central bankers from The Bahamas and Ghana on how they believe CBDCs make a difference. This would include topics such as ensuring the poor get the same access to financial services as the rich do.
That’s the goal. But the truth is that CBDCs have yet to catch the public’s attention in countries that mint them. Nigeria’s eNaira makes up a mere 0.01 percent of currency in circulation. Even in China, the circulation of the digital yuan is only 0.13 percent. Bruegel put all these details together in a policy paper, published Monday morning. The 19-page document isn’t exactly a glowing endorsement of CBDCs. Public-backed banknotes could upset the payments market and “change the face of retail banking,” the paper said. “An action that should not be done lightly.”
Wholesale CBDC: More effort should be put into creating wholesale CBDCs, the paper concludes. The ECB has repeatedly said that its goal is to create a digital euro for retail use. The euroclub already has a wholesale equivalent in many ways and the ECB is looking into how it can modernize its plumbing to allow blockchains to plug into its settlement system. “It may be early days, but the EU must explore how to reap the benefits of new technology in wholesale payments while protecting the global cooperation from which it benefits,” the paper said.
TURKEY DEFICIT: Turkey’s current account deficit widened more than expected in April to $5.40 billion, taking the cumulative deficit so far this year to a record $30 billion. The news was consistent with the dramatic deterioration in the current account in the first quarter, and means that even more than usual will depend on the summer tourism season, which is only now kicking into gear.
The lira, which has slid alarmingly in the last couple of weeks, was paused for breath as expectations for some shock therapy mounted. JPMorgan analysts expect new Governor Hafize Gaye Erkan to raise the key one-week rate to 25 percent at her first policy meeting next week.
“How did I manage to get Draghi nominated to the ECB? Merkel had chosen the best possible candidate, the Bundesbank President, an extraordinary professional. When the EU council was asked the question [of the next ECB President], the only votes for her candidate were from herself, her lackey Sarkozy and the Finnish President. Everyone else voted for my candidate. Why? Because I went to visit each and every one of them and told them that Germany had too much power in Europe and it could not be given the ECB Presidency too. Why the Finnish President? He was in a hospital and came to Brussels for the summit before going back to the hospital. I was not allowed to meet him, otherwise he too would have voted for Draghi,” the late Silvio Berlusconi, Italian media tycoon and four-time Prime Minister of Italy, recalled in 2019.
“I express the deepest condolences regarding his death. For the last fifty years he was truly the protagonist of Italian public life … as leader he transformed politics and became loved by millions of Italians for his humanity and charisma,” Ex-ECB president Mario Draghi said about Berlusconi, as reported by ANSA on Monday.
“As a result of his passing, Forza Italia will probably collapse — there is no successor within it who can match or even near his charisma and political nous … The biggest policy impact will be to make the Italian government more pro-Ukraine. Lega won’t be able to hide behind having another pro-Russia coalition partner,” Elettra Ardissino, Greenmantle’s senior European analyst, told Morning Central Banker on Monday.
“It may only be a pause in the hiking process, but stopping to survey the damage of the past year is no bad thing,” said Paul Donovan, UBS Wealth Management chief global economist, looking ahead to the Fed meeting in a morning briefing on Monday.
“We think we’re going to be in a world in which, at the margin, there’s probably going to be less policy support provided in economic downturns than we’ve seen … We’re seeing some early evidence of what we call (quantitative easing) fatigue,” former Federal Reserve vice chair Richard Clarida, now an economic advisor at PIMCO, said at an event on Monday.
— Exclusive: Pakistan’s Russian crude shipment paid in Chinese currency (Reuters)
— Anger over MPC member’s call for Bank to create special rates for green investment (Telegraph)
— BOE’s Catherine Mann says U.K. government needs longer-term agenda (Bloomberg)
— Several Chinese lenders cut yuan deposit rates from Monday (Reuters)
THANKS TO: Carlo Boffa, Ben Munster, Bjarke Smith-Meyer and Izabella Kaminska.
(Editor’s note: this is intended as a selective list, giving precedence to European events)
TUESDAY, 13 June
U.K. NIESR GDP estimate, 3 a.m.
U.K. April average earnings, employment 8 a.m.
U.K. May claimant count, 8 a.m.
The U.K. Treasury Committee hosts an oral session on the appointment of Megan Greene to the Monetary Policy Committee at 10:15 a.m. BST, London.
Germany ZEW economic sentiment index, 11 a.m.
ECB’s Enria to speak at Goldman Sachs event in Paris, 11:45
ECB Weekly financial statements and APP/PEPP portfolio update, 3 p.m.
U.S. May CPI, 2:30 p.m.
BoE Governor Bailey testifies to the House of Lords about BoE independence, 4 p.m.
BoE’s Dhingra speaks, 5 p.m.
U.S. auctions 52-week bills, 5:30 p.m.
U.S. auctions 30-year bonds, 7 p.m.
All times CET, unless otherwise stated.