continue in US, employment falls by 467,000 in June
concern about credit growth
Â·ECB â€śhappyâ€ť with
one-year tender, not planning to actively reduce excess liquidity
ECB: Concealed rate cut
The prevailing mood in the equity markets was favourable,
and against this backdrop, EUR-USD strengthened somewhat up until the middle of
the week. The single currency was mostly above 1.40, and even touched 1.42
temporarily. The movement was volatile, however.
The optimists referred primarily to the sustained improvement
in the various surveys, e.g. the EU Commissionâ€™s Economic Sentiment, the US ISM
index and, last but not least, the Chinese purchasing managersâ€™ index.
On the other hand, however, there were also negative
reports: consumer confidence in the US deteriorated quite significantly in June,
particularly because of worries about jobs. The ADP indicator sounded a warning
on the future development of employment. Despite good production and foreign
trade figures for the second quarter, the improvement in the Tankan, the Bank
of Japanâ€™s quarterly survey of business sentiment, was far less than expected.
And in the eurozone, after the release of the latest data on money supply and credit
development, fears that credit supply to the corporate sector could be
However, it was the US labour market report that really darkened the mood.
After the ray of hope
in May, when employment had â€śonlyâ€ť fallen by 345,000
(now revised to 319,000), job losses accelerated again in June. A total of
467,000 jobs were axed last month, over half of which were in the service
sector. The unemployment rate rose to 9.5%. Under the impact of these figures,
equity markets buckled and so did the euro. EUR-USD dropped to 1.40, thus
ending the week on the same level as at the end of the previous week.
ECB: Actions speak louder than words
At first glance, the main messages in the ECB Councilâ€™s
July statement are more or less the same as the previous month: the Council
still considers its monetary policy â€śappropriateâ€ť; it still sees growth and
price risks as â€śbalancedâ€ť, and it still expects an economic recovery to set in around
the middle of 2010.
Nevertheless, the bond marketsâ€™ reaction to the statement
and Jean-Claude Trichetâ€™s remarks was bullish, whereas EUR-USD weakened. In our
view, the marketsâ€™ reaction can be put down to two factors: firstly, the
one-year tender, pumping a staggering â‚¬442bn of liquidity into the market, and
secondly, credit development, which is apparently now starting to worry the ECB
In the wake of the ECBâ€™s first one-year refinancing operation
last week, there was an unexpected sharp increase in credit institutionsâ€™
liquidity supply. Due to the liquidity glut in the money market, the overnight
call rate fell to around the ECBâ€™s deposit facility rate, which is currently at
0.25%. All in all, money market rates at the short end were pushed down
significantly â€“ below the repo rate. At the same time, a considerable amount of
liquidity â€“ to date almost â‚¬290bn â€“ was placed in the deposit facility.
At the press conference, ECB president Jean- Claude
Trichet signalled that the ECB was not planning to intervene actively to reduce
the excess liquidity. Instead, Mr Trichet emphasized that the ECB was content
with the result. The central bank is expecting the liquidity glut to diminish
in the course of time, presumably as less use will be made of shorter-dated
In actual fact, the ECB has thus implemented a rate
cut: although it has not lowered the refi rate, it has significantly extended
the period for which refinancing at this refi rate is available, and linked the
overnight call rate, which used to be close to the refi rate, to the deposit
facility rate, which is lower. Currently over 80% of central bank money
allocated to credit institutions is on the basis of long-term refinancing
operations, about 50% is covered by the new one-year tender.
Furthermore, the ECB governing council is seeing credit
supply to the economy in a more critical light. Last month, the statement still
contained the â€śoptimisticâ€ť view that weak lending partly reflected companiesâ€™
lower need for working capital. This explanation is no longer given in the latest
statement. Instead of this, ECB president Trichet appealed to the banks to
fulfil their obligation to supply credit. Remarks made by Bundesbank president
Axel Weber also fit into this picture: he had indicated that if there was noimprovement in credit supply, measures
bypassing the banks might be necessary.
ECB representatives often make hawkish comments. Their
actions reveal, however, that they do not think the situation has eased. In the
last few weeks, there had been some speculation about interest rate hikes, but
the ECB is still nowhere near the beginning of a tightening cycle.
Rieke +49 69 718-4114
Grabbe / Klaus NĂ¤fken
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