Will the ECB follow through?
Even if not immediately, the ECB will have to follow through because words alone won’t be enough to keep bond yields down. We’ve had more than enough of that over the past two years. The other issue is whether the ECB pushes the boundaries of its mandate, buying bonds without fully sterilising the purchases, which would align its policy more closely with the quantitative easing of other central banks. But bond-buying under the current program cannot be sufficient (because it’s been tried in the past). Purchases would either have to be unsterilised (in effect printing money) and/or concrete steps towards giving the ESM (the permanent bailout facility) would have to be taken to give reassurance that there were sufficient funds in place to back-stop both Spain and Italy.
The pressure from eurozone banks. Interesting data out from the ECB on the lending side underlined the credit crunch that the eurozone finds itself in. Compared to the same time a year ago lending is down 0.2% YoY and has contracted for a second consecutive month on this measure of lending. Back at the start of the year lending was rising just over 1% YoY and earlier in 2010 by above 3.0%. Of course, the question being asked is whether this fall relates to tougher lending standards from banks or less demand for credit from both households and companies. The answer appears to be a bit of both, although these numbers are for the eurozone as a whole and there is naturally a great degree of variation between different countries. That said, the bank-lending survey released by the ECB yesterday did show an overall net tightening of lending standards, but the balance between the respondents was broadly the same as in the first quarter. In short, things have not been getting worse. It was also the case however that, according to the ECB, the big fall-off in demand for loans seen through last year remains. The data offered further confirmation (not that it was needed) that, for the eurozone, the banks are central to the current crisis which is why the latest initiatives have been concentrated on breaking that link between the banks and their respective governments and also improving the eurozone-wide monitoring (which some see as the first steps towards the creation of a banking union).
Japan’s continued deflationary trap. The latest inflation numbers were released from Japan overnight and proved to be softer than expected overall with the preferred ex-fresh food measure of prices in negative territory for the second month in a row. These were the nationwide June numbers and the indications for July just out from Tokyo suggest more of the same is on the way. More notable was the fall in retail sales, rising just 0.2% after a 3.6% increase in May. The data have been volatile, but do show a slowing trend beneath the noise. As for the yen, the main standout yesterday was the stability vs. the USD in light of the move being seen elsewhere, but it was notable that both were aligned as laggards in the ‘risk-on’ move. EUR/JPY has decisively rebounded after the July fall, comfortably back above the 95.00 level for now.
Simon Smith, Chief Economist