Euro Area Money Supply Contracts for the First Time Since 2010
Economic news and commentary for August 28, 2023
Euro Area Money Supply
The annual growth of M3 money supply in the euro area turned negative for the first time since May 2010. In July, the M3 growth was -0.4% YoY, down from 0.6% YoY in June. The growth of the less broad measure of money supply, the M1 monetary aggregate, continued to trend at all-time lows, setting a new record low of -9.2% YoY. Both of these values represent the unprecedented level of monetary tightening in the euro area economy as the ECB tightening cycle matures. The tightening was evident in the continued contraction in both credit to the private and public sectors. Credit to the government has had a negative effect on overall money supply growth since April of this year.
The tighter financial conditions have caused a significant slowdown in lending as was largely expected. The growth of household loans in July reached its lowest point since October 2015 at 1.3% YoY. Similarly, the growth of loans to non-financial corporations slowed significantly to 2.2% YoY (from 3.0% YoY in June) which is the lowest since September 2016 (when not considering the pandemic lows). What is most jarring about these trends is the speed of the deceleration in loan growth. For example, less than a year ago, corporate loan growth was at its peak at 8.9% YoY in October 2022. The rate of deceleration is reminiscent of the sharp easing in loan growth during the financial crisis in 2008-2009. It is no surprise that this intensity of liquidity withdrawal is causing a sharp deterioration in the economic outlook; in fact, it is also quite surprising that a significant GDP contraction has not occurred already.
This data comes after ECB President Christine Lagarde spoke at the annual Jackson Hole Economic Policy Symposium on structural shifts in the global economy. Specifically, she mentions the new tightening in labor markets, the transition in energy generation toward renewables, and a deepening geopolitical divide. She points out that the new environment created by these shifts “sets the stage for larger relative price shocks than we saw before the pandemic” which demands central banks are more attentive to volatility. Despite structural changes, there was no backing down from the initial inflation targets: “We must and we will keep inflation at 2% over the medium term.”
In total, the speech maintains the strong hawkishness that the ECB has represented since the start of its hiking cycle. There is a clear admission that inflationary pressures are much higher than the pre-pandemic period and that these pressures are possibly new long-term threats to price stability. But because Lagarde and the ECB are not giving themselves more leeway on the 2% inflation target, it is likely that they see a higher equilibrium long-term policy rate compared to the Great Recession era when inflation struggled to reach the 2% target due to underwhelming price growth. Lagarde ends with the closest thing to policy guidance in the speech: “In the current environment, this means – for the ECB – setting interest rates at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target.”
According to the reading of M3 money supply growth in July, the broader money supply has just started contracting. Loan growth to households and non-financial corporations is low, yes, but it is still expanding at an annual rate. It seems clear that the ECB is not yet satisfied with this level of financial tightening, and ECB members will perceive it necessary for stronger tightening to get inflation back where it wants to be. The hiking cycle is probably nearing its end, but that doesn’t mean that a shift towards rate cuts or dovish policy is coming. In fact, it would not be surprising if Lagarde and the ECB accept a GDP contraction and even possibly a full-on recession in the next 6-9 months if that is what it took to normalize elevated inflation.
Still to come…
10:30 am (EST) - Dallas Fed Manufacturing Survey
7:30 pm - Japan Unemployment Rate
Morning Reading List
Other Data Releases Today
Australian retail sales grew 0.5% MoM and 2.1% YoY in July, slower than the 2.3% YoY in June.
Dept Stores: 3.6% MoM
Clothing: 2.0% MoM
Restaurant: 1.3% MoM
Other: 0.3% MoM
Food: 0.0% MoM
House Goods: -0.2% MoM
ECB Money Supply
Eurozone bank lending continues to weaken as money growth turns negative (ING) - Higher interest rates and a stagnant economy keep bank lending on a weakening trend. Annual growth in broad money growth is now negative. This adds to expectations of a weak eurozone economy in the quarters ahead, but as the effects remain gradual this should not be a game-changer for the ECB ahead of its September meeting.
Jackson Hole
Powell signals Fed to tread carefully, but that rates will stay high (ING) - Chair Powell acknowledges that monetary policy is “restrictive” and that policymakers will “proceed carefully” in determining whether to hike rates further. September is set for a pause, but robust growth means the door remains ajar for a further potential hike. Markets see a 50-50 chance of a final hike while we think rates have most probably peaked.
Powell at Jackson Hole: Fed Committed to 2% Inflation but Agility Required (Wells Fargo) - Fed Chair Jerome Powell reiterated the FOMC's commitment to bring inflation down to 2% during his speech in Jackson Hole, WY today. He stated that "two percent is and will remain our inflation target."
Chair Powell on "navigating by the stars under cloudy skies" (TD Bank) - The Chair's speech at Jackson Hole is always a marquee economic event, but with the Fed at a pivot point in its tightening cycle, this year's speech was particularly important. Markets are trying to gauge whether the fed is in wait-and-see mode, and feels it can be patient and wait for past rate hikes to cool the economy and bring down inflation, or whether more rate hikes are required. Looking at the market's reaction immediately following the speech, the odds on future fed hikes didn't shift a great deal. The slim odds of a hike in September got slimmer, and the roughly 50% odds of a hike in November are every so slightly higher. Market odds on the first rate cut next year remain unchanged at June.
Fed Chair Powell's Jackson Hole Speech: Done Lots but Not Done (BMO) - Chair Powell’s speech at the KC Fed’s Economic Policy Symposium in Jackson Hole was titled “Inflation: Progress and the Path Ahead”. In the first paragraph he asserted: “Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” After a discussion of inflation’s past path, Powell turned to the outlook. As has been mentioned countless times since March 2022, Powell reiterated that “getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions”.
Powell displays agile optionality in the face of uncertainty (EY Parthenon) - Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium was a well-executed neutral speech where he avoided saying anything new, focused on policy optionality and insisted on the Fed’s data-dependent approach.
Jackson Hole Symposium leaves markets data-dependent (Saxo Bank) - The Jackson Hole symposium's commentary has left the Fed's options open, keeping central banks and markets data-dependent. Key data, like JOLTS job openings, PCE inflation, NFP jobs report, and ISM manufacturing, are due.
US
Cracks Starting to Emerge? (Wells Fargo) - After a strong run last week, this week’s barrage of economic data brought expectations back down to Earth. Durable goods orders seem to be stagnating as high mortgage rates keep the housing market under pressure. Meanwhile, preliminary benchmark revisions from BLS reveal that the labor market is not as scorching as previously thought.
Europe
ECB: Not a Done Deal Yet (BMO) - Germany’s composite PMI measure, sitting at a 3-year low, suggests that the economy shrank in early Q3. Croatia’s Vujcic also chimed in, stating that “we are now certainly in the restrictive territory but whether we are in a restrictive-enough territory remains to be seen.” BMO’s view is that the ECB will take a pass at the September monetary policy meeting but the debate will, as usual, be heated.
Germany: Leader To Laggard (Northern Trust) - After a decade of robust economic performance, Germany entered the pandemic with poor momentum and has struggled to regain its stride. The German economy was among the last in Europe to return to pre-COVID output levels. Germany is the only nation among the world’s seven most advanced economies (G7) that slipped into recession at the start of the year. Going by the Bundesbank’s estimates, the picture isn’t going to change in the third quarter. In fact, the International Monetary Fund predicts Germany will be the only G7 economy to contract in 2023.
Swedish Labour Market: Strong July (Nordea) - The employment rate reached a new record-high in July. Employment increased by 1.0 percent on the month and was up 2.4% y/y. The unemployment level fell back to 7.0 percent, which is the lowest reading since last summer.
Canada
Sahm’s Club, Canadian style (CIBC) - The week ahead’s quarterly GDP likely won’t raise any eyebrows, and should be enough to dampen recession fears for
a while longer. Some searches for the “R” word were no doubt triggered by the flash estimate for real GDP in June. It showed a decline of 0.2%, and that benefited from a rebound in oil/gas production after fire-related disruptions in May.
Canadian Housing: Can’t Buy What You Can’t Afford (BMO) - Just two extra taps on the rate brakes was all it took to bring Canada’s fledgling housing recovery to a screeching halt this summer. Resale transactions fell for the first time in six months in July, as a pullback in pricey Ontario and British Columbia overshadowed gains in less-expensive Alberta, Saskatchewan and Quebec.
The Case of Canadian Business (BMO) - While the music still appears to be playing for Canadian businesses, it has slowed to a waltz. Elevated profit margins will provide a counterbalance to rising borrowing costs, but the looming debt overhang, particularly for micro enterprises, is the last thing that an economy still struggling to incentivize business investment needs.
BRICS
Research Global - The new BRICS+ is not a love marriage (Danske Bank) - BRICS, the group of developing nations, announced on Thursday they would welcome six new members starting next year; Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and United Arab Emirates. The new group represents 1/3 of global GDP and close to half of the world population. Although it embodies a serious counter force for the US-led western bloc, internal rifts are more than likely to weaken its influence.
Inflation
Inflation: Great Expectations (Northern Trust) - The anticipation of higher prices can be very dangerous for an economy, as those expectations can become self-fulfilling. Fortunately, inflation expectations have remained reasonably well-behaved in spite of the price level surges we’ve endured over the past two years. This is an especially fortunate outcome for central banks around the world.
Rates
High Spreads Pushing Up Mortgage Rates (Northern Trust) - Purchasing a home will stretch most budgets. For recent home buyers, the cost of debt has been the biggest burden. This week, 30-year fixed mortgage rates quoted in the Wall Street Journal exceeded 7.7%, a level not seen since the year 2000. While the rising rate environment is a central feature of this economic cycle, most other long-dated debt has not seen such a sharp increase in cost. Why are mortgage rates so stretched?
Oil
Crude Oil Outlook: Don’t Pop the Champagne Yet (BMO) - Recent developments on the supply front highlight that the outlook for crude oil prices is not all sunshine and rainbows. Considerable headwinds and uncertainties persist, which are reasons why we remain comfortable with our current forecast for WTI to average around $80 in the second half of the year and into 2024.
Oil Price Shocks and Inflation (Dallas Fed) - Despite growing interest in the impact of oil and other energy price shocks on inflation and inflation expectations, until recently this question has not received much attention. This survey not only presents empirical results for the U.S. economy, but expands the analysis to include other major economies. We find that only in the Euro area and in the U.K. energy price shocks are associated with a material increase in core consumer prices.
What Is the Impact of Oil Supply Shocks on Employment? (St Louis Fed) - As anyone who owns a car knows well, the price of oil can be extremely volatile. But do sudden shocks in the supply of oil affect something like jobs? In a December Regional Economist article, Bill Dupor, an economist and senior economic policy advisor at the St. Louis Fed, examined the relationship between oil and employment.
Agriculture
The State of Agriculture 2023: Easing Inflation Helps Give the Agriculture Industry a Boost (Wells Fargo) - Agricultural producers may finally be finding some reprieve as inflation turns a corner and drought conditions begin to improve. Input inflation has softened considerably over the past year, and supply chain normalization has produced price declines for feed and fertilizer. Labor cost pressures have also started to slow as farmers look to be seeing improvements in labor supply. Yet as production costs trend lower, so have final selling prices, putting farm cash flows under pressure. While heat waves continue to threaten production, food commodity prices recently have retreated on promising weather forecasts, fueling expectations for higher output.
Outlook
International Economic Outlook: August 2023 (Wells Fargo) - As global growth prospects have become more clouded, we have revised our global GDP forecast lower since our previous revision in early August. We now expect global GDP growth of 2.6% in 2023, and a further slowdown to 2.3% in 2024. Diminished prospects for China's economy have more than offset slight upward revisions to the growth outlook for Japan, the United Kingdom, Canada and Mexico.
Macro & Markets: Flying high (Nordea) - As US bond yields have hit new highs, the Euro-area economic outlook continues to deteriorate. We find notable differences between the outlook of the US and the Euro area and still think that the ECB is done raising rates.
Weekly Focus - Slowing down (Danske Bank) - Financial stress in China and weak US and euro PMIs set the scene for global markets this week. It started out with continued focus on China where the housing crisis and financial risks from shadow banking has resurfaced. Chinese financial stress eased somewhat during the week, though, as there was no new bad news to fuel a further sell-off. It does not mean the problems are no longer there, however. We see increasing downside risks to Chinese growth and have revised down the annual growth estimate to 4.8% from 5.2%.
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