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By GEOFFREY SMITH
with JOHANNA TREECK, BEN MUNSTER, ANJULI DAVIES, HANNAH BRENTON and IZABELLA KAMINSKA
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— UK May inflation set to have huge influence on Bank of England rate meeting on Thursday.
— Powell to testify in Congress as US housing market continues to defy gravity.
— The ECB updates on the euro’s fitness for a multipolar world.
ECB 3.50% ⇡ — BOE 4.5% ⇡ — FED 5.25% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.65%⇣— CBR 7.5% ⇣ — BOC 4.75 ⇡— SARB 8.25% ⇡
Good morning everyone, and welcome to another action-packed day of monetary high jinks. The British government, in its infinite wisdom, has convened a meeting with the country’s biggest mortgage lenders for Friday, ostensibly to discuss how they can jointly undermine the Bank of England’s efforts to get inflation under control.
Chancellor of the Exchequer Jeremy Hunt is clearly trying to hold the line against pressure from backbenchers for concessions for homeowners, who are facing a hard enough struggle to defend their seats as it is, even before their constituents endure a £3,000 a year rise in debt servicing costs. To his credit, he’s resisting siren calls to reintroduce that classic tax break for the middle class, mortgage interest tax relief (see below). His answers in the Commons on Tuesday hinted heavily at preparing for another round of forbearance by lenders, which makes for better politics, but complicates the task of both prudential and monetary policy.
Politics is in the air at the ECB too, albeit in its outer satellites. Bank of Finland Governor Olli Rehn is set to declare his candidacy for the Finnish presidency later Wednesday. Johanna’s story here was a step ahead, as usual.
Whoever takes over from Rehn while he’s campaigning will at least not have to worry about Taylor Swift sending Helsinki hotel and restaurant prices through the roof next summer. Economists in Ireland, Sweden and the Netherlands, be sure to check here and update your models accordingly.
Send tips to [email protected], [email protected], [email protected], [email protected]. Tweet us, too: @Geoffreytsmith, @JohannaTreeck, @Ben_Munster, @izakaminska
— UK CPI May inflation, 8 a.m.
— ECB to publish annual report on the international role of the euro, 12 p.m.
— Federal Reserve Chair Jerome Powell to testify before Congress, 4 p.m.
THE CPI BASKET CASE: The U.K. inflation figures for June, due at 8 a.m. CET, have the potential to get both the Bank of England and the ruling Conservative Party reaching for the smelling salts. Anjuli’s thorough preview explains why here.
PARSING US DATA: Federal Reserve chair Jerome Powell starts two days of Congressional testimony at the Senate Banking Committee at 4 p.m., but look out for his prepared remarks, which should be available ahead of time. Conventional wisdom had it that both the consumer and the housing market would buckle under the pressure of higher interest rates, but last week’s retail sales and Tuesday’s housing starts numbers suggest conventional wisdom is … just plain wrong.
On the U.S. housing front: The market is roaring back to life. Housing starts rose by a whopping 21.7 percent month-on-month in May to their highest in 13 months, while building permits rose for the first time in four months, up 5.2 percent from April. The numbers, which come only a couple of days after another very upbeat report from the National Association of Home Builders, suggest that the most interest-rate sensitive part of the U.S. economy is still coping pretty nicely with the Federal Reserve’s tightening cycle, thank you very much.
ECB TO PUSH BACK AGAINST WEAPONIZATION?: The European Central Bank publishes its annual report on the international role of the euro. Watch out for public confirmation of concerns about the European Commission’s plan to seize the Russian Central Bank’s reserves in order to pay for the reconstruction of Ukraine.
COOLING OFF IN GERMANY: Another bigger-than-expected drop in producer prices in Germany in May pointed to further easing of inflationary pressure in the pipeline. Prices fell for the seventh time in the last eight months, by 1.4 percent rather than the 0.7 expected. In year-on-year terms, the PPI fell to 1.0 percent, its lowest since January 2021.
Electricity (down 3.9 percent on the month and 10.2 percent on the year) and petroleum products showed some of the biggest declines, with metals also cheaper on the year. There were still some chunky prices increases for various food categories, however: sugar was up 92 percent year-on-year, processed potatoes up 41 percent and pork up 22.1 percent. Given that those three categories made up around 95 percent of the calories consumed by the Smith family when we lived there, perhaps it’s for the best that we left…
Hawk shaming: TS Lombard’s Davide Oneglia pointed out with some relish the contrast between the clear improvement in core goods inflation and the increased hawkishness of top ECB officials.
“If inflation moderates and growth slows, as we expect, the focus of the ECB will soon shift from ‘how high’ the terminal rate will go to ‘how long’ the current level of restriction should be kept in place,” he argued in a note to clients.
DRAGON FESTIVAL CUT: The People’s Bank of China cut its one-year loan prime rate by 0.1 percentage points to 3.55 percent. The modest move disappointed some, but was perfectly consistent with the adjustments to its other shorter-term facilities over the last couple of weeks.
“Weak aggregate demand, PPI deflation and CPI contraction are likely to trigger adoption of a comprehensive policy support package – but only at the next Politburo Economic Meeting in late July or early August,” BNP analysts said in a note before the PBoC’s decisions.
HUNGARY LIKE A DOVE: The National Bank of Hungary cut its overnight deposit rate — which is a new rate introduced last October as an emergency measure — by a full percentage point to 16 percent, as expected. It also cut the rate on optional reserves, and on FX swap tenders and quick tenders by the same amount. The base rate, now relegated in terms of importance, was kept steady at 13 percent, also as expected.
The MNB was upbeat about the prospects for disinflation, saying it could fall to single digits by the end of the year, and into its tolerance band by early 2025 (i.e. a full year earlier than the ECB expects to achieve the same).
ABOUT THAT LDI RISK: With Gilt yields back at September’s level, some are wondering why isn’t the U.K. in the grips of another LDI pension panic? One clue came last week when Bank of England governor Andrew Bailey flagged a little known structural fact about LDI funds during a testimony to a Lords committee: that the real source of contagion probably came from the 15 percent or so of funds invested in pooled structures rather than segregated ones.
Okay, but why? In a speech to the National Institute of Economic and Social Research on Tuesday about what really amplified the LDI crisis, Jonathan Hall, an external member of the bank’s Financial Policy Committee, provided further insight into the issue explaining that the limited liability status of most of these pooled funds left them unable to call down liquidity from sponsors to keep their positions opened, forcing them to liquidate.
Automatic liquidation: Limited liability was a genius financial invention that helped to propel risk-taking and commerce from the 19th century onward. But, as Hall points out, it also “creates the risk that, if losses exceed the initial investment, the position will be unwound by the manager or leverage provider.”
Like getting rekt, but in tradfi? Those who know their crypto will find this all very familiar. So-called automatic liquidations (designed by derivative crypto platforms to stop leveraged customers from losing more than the margin they’ve invested while protecting the wider platform from having to socialize losses) are known for having unintended volatile consequences on crypto asset markets. In the parlance of the industry, the death spiral is popularly referred to as getting “rekt”. See this explainer about how it happens on the Bitmex exchange.
Solution? To prevent these dynamic (i.e. automatic) factors causing chaos again, the FPC has recommended funds hold larger buffers and begin to recapitalize at far higher levels of resilience. It’s a little bit analogous to what some of the insurance funds that crypto exchanges now hold do too. The good news is that, so far, the recommendations seem to be working. The BoE has further committed to trying to understand better how dynamic factors associated with fund mandates and legal structures can lead to second-order effects via its new system-wide exploratory exercise, announced Monday. “An exercise of this type, with its huge, system-wide scope, has never been attempted before,” said Hall.
ONE LEDGER TO RULE THEM ALL: To emphasize just how keen the Bank for International Settlements is on central bank digital currencies and the so-called tokenization of deposits, the central banker’s central bank pre-released (like any good superstar) a whole chapter from its annual economic report 2023 setting out its vision for such things five days early. Yay.
What’s there to know? Basel will undoubtedly be delighted with any media coverage that highlights that the BIS believes “a unified ledger could usher in ‘profound’ economic change” or some such. But another justifiable take would be that the chapter features no less than 96 mentions of the word “could”.
Could it be (CBDC) magic? “Tokenized deposits could be designed to resemble the workings of regular bank deposits in the current system,” and “transactions in wholesale CBDC could incorporate all the features such as the composability and contingent performance of the actions mentioned above” and “a unified ledger could be considered a ‘common venue’ where money and other tokenized objects come together to enable seamless integration of transaction”.
But the real question isn’t ‘could?’ It’s ‘does anybody really benefit from this happening? And what’s really new here?’
NOT A RETURN TO THE FREE BANKING ERA: While tokenized deposits might evoke memories of the free banking era when different flavors of banknotes, issued by varying banking institutions at par to a sovereign note, would compete against each other and be discounted according to risk perception, we’re told by BIS bods that’s not what’s on the table here. The singleness of money would be guaranteed by the fact that every transaction must be settled with central bank digital currency. “The value-added comes from the capabilities of tokenization, like atomic settlement and composability,” we were told.
Tall order. The vision portrayed by the BIS is of a system of interoperating ledgers that would allow every aspect of the financial system to settle atomically in real-time (currently real-time settlement is reserved for only very large transactions in many jurisdictions). Doing so would reduce settlement risk while adding terrifying exciting new features to money like “composability” (a.k.a. programing) which would help to do away with the need for collateral altogether. The system would also be poised to eliminate risk, fraud, financial exclusion, though not yet world hunger.
Real-time information: “Creditors would not need to worry about the risk that the buyer will not honor its obligations,” the report noted, explaining that banks could instead extend loans via smart contracts that act upon real-time information obtained from total — but anonymized! — system surveillance. So if your ship passes the Horn of Africa without being attacked by pirates, you can pass Go, and you can collect $200. If not, bad luck.
IMF SUPER CBDC: The IMF announced at a conference in Morocco that it is developing a supranational “XC” platform that it imagines will one day undergird the vast, international system of cross-border CBDC trading. While domestically issued CBDCs will sit safely in central bank reserves, the fund’s putative platform will support “standardized digital representations” of each currency to enable speedy trading across borders, according to Tobias Adrian, the IMF’s monetary and capital markets lead.
Institutional knockoff. We at Morning Central Banker are loath to overemphasize the endless similarities between CBDC and crypto patter, but we couldn’t help noticing just how much of Adrian’s speech read as though it had been lifted from a press release for a 2017-era dogecoin remittances platform launched by two baseball-cap-clad guys in a San Diego warehouse. As well as saying that XC would facilitate “tokenized deposits” and “automated” transactions,” Adrian offered the classic crypto refrain that users will ultimately prefer to “trust” the platform’s tech over human counterparts. Did Ripple write this announcement?
TURKISH WAGES: Turkey’s government raised the minimum wage by over one-third, aiming to compensate the lower-paid for a year of rampant inflation. If that sounds a lot, bear in mind that Turkish inflation over the last year started at 73 percent and peaked at over 85 percent. May’s reading of 39.6 percent was a 17-month low.
Prepare for the bitter pill: In other words, the increase doesn’t come close to compensating for the general loss of purchasing power. As such, it can be seen as the first sign of the new government preparing to dish out some unpopular remedies. The central bank, under the new leadership of Hafize Gaye Erkan, is expected to jack up the one-week repo rate to 20 percent or more at its meeting on Thursday.
“Most private-sector organizations would kill to have the sense of purpose, unity and commitment to a mission that I see in the Bank of England,” said David Roberts, chairman of the Bank of England’s Court, in the House of Lords on Tuesday.
“Those kind of schemes, which involve injecting large amounts of cash into the economy, right now would be inflationary. So, much as we sympathize with the difficulties and we will do everything we can to help people seeing their mortgage costs go up, we won’t do anything that would help to prolong inflation,” said Chancellor of the Exchequer Jeremy Hunt, when asked on Tuesday in the House of Commons about the possibility of reintroducing mortgage interest tax relief.
“If it isn’t hurting, it isn’t working,” John Major as Chancellor of the Exchequer in 1989, on his own campaign to squash double-digit inflation.
— KKR to buy up to $44 billion of PayPal’s buy now, pay later loans in Europe (Reuters)
— Swedes warm up to euro as krona approaches all-time lows (Bloomberg)
— Can Chinese growth defy gravity? (Bruegel)
(Editor’s note: this is intended as a selective list, giving precedence to European events)
WEDNESDAY, 21 June
Bank of Japan, monetary policy meeting minutes, 1:50 a.m.
U.K. May CPI, PPI, PSBR data, 8 a.m.
ECB publishes annual report on the international role of the euro, 12 p.m.
Czech National Bank, monetary policy decisions, 2:30 p.m.
ECB Board member Isabel Schnabel speaks in Berlin, 3:45 p.m.
Bundesbank President Joachim Nagel speaks in Berlin, 3:45 p.m.
Federal Reserve Chair Jerome Powell testifies, 4 p.m.
Senate confirmation hearing for Adrian Kugler as Federal Reserve Governor, n.a.
Bank of Canada Summary of Deliberations, 7:30 p.m.
Cleveland Fed President Loretta Mester speaks, 10 p.m.
Banco Central do Brasil monetary policy decisions, 11 p.m.
All times CET unless otherwise stated.