Sorry for the brief absence — it will resume as I will be on holiday from tomorrow until next Thursday. I have caught up on the date releases I have missed, below. Incidentally America is on holiday today for Independence Day. Happy Independence Day to my American readers.

ECB Action

The market is expecting action from the ECB tomorrow in the form of a 25bps cut in both the main refinancing rate and the deposit rate (the latter to zero). There is scope for disappointment here, and indeed UBS has argued that the ECB will remain on hold because a cut would be interpreted as a reward to governments for their small progress at their recent meeting. If the ECB follows this argument, it will be even more ridiculous than I thought. Before governments acted, there was an argument going around that there was no point in the ECB acting because that would only give governments an excuse to do nothing. I have the impression that the ECB committee does not find this view wholly unpersuasive. If the committee also accepted the argument that it cannot act after governments have acted either, then it would have a cast-iron reason for never doing anything at all. That would be pretty daft. Also, it would be a dereliction of duty. If central banks were supposed to be bound by what is politically acceptable, then the most reasonable thing to do would be to fill them with politicians; and indeed, if that would make sense, then it would make sense to do away with their independence altogether. The whole point of appointing economists to the board of a central bank is that they are, supposedly, experts in using the right model to come to the right conclusions, and the institutional independence of the central bank is supposed to give them the space to do just that. If they stop doing it — for example, by abandoning their models and making decisions based on how they would look politically — then there is no reason to expect them to be any better at setting interest rates than a group of well-informed politicians.

People are terribly bad at remembering what they are in a position for, and what their edge is. Having forgotten those things, they start acting in ways that mean there is no reason to expect them to have superior ability in their jobs. I think that this is a behavioural bias that applies to me as much as anyone. The only way to deal with such biases is to engage system 2 (http://bit.ly/Ra3aM7): remind yourself, over and over, what you are trying to do and where you think your edge is, and be very aware of the danger.

Not to get too gloomy about the situation, I do not think that the ECB actually will fall for this argument. Draghi has already said, on the 29th, “I am actually quite pleased with the outcome of the European Council,” and “It showed the long-term commitment to the euro by all member states of the euro area.” These are not the statements of a man who is afraid of seeming to judge the actions of governments.

Incidentally, on the subject of government action, the FT reports that the CSU has been threatening to pull out of Merkel’s coalition if it is not satisfied with the requirements for reforms and other conditions attached to any future extension of emergency lending capacity. This is an important political constraint for Mrs. Merkel. If her coalition did collapse, then the SPD and Greens would likely be supportive of further action on the Eurozone — they have been much softer in their statements than the Chancellor. The problem is that Merkel, like any politician, will be inclined to act in her own interest rather than in the national and European interest unless her hand is forced.

On the subject of that European agreement, the Finns have been complaining about the idea of using the ESM to buy bonds in the secondary market. They can’t necessarily block it, though. According to FT Alphaville, if the European Commission and ECB agree that there is an emergency then only an 85% majority is needed to initiate bond purchases. Votes are allocated in proportion to capital share, so the Germans carry the most weight, and the Finns could not block the move alone (nor together with the Netherlands, which has also been rather hard-line).

FPC Mandates No Action

The UK’s Financial Policy Committee has just issued its first statement. I did not order anything very specific. It said that banks should temporarily raise capital levels above their Basel III requirements by restraining dividends and compensation on account of the riskiness of the present situation (with the FSA to calculate levels bank by bank). It also said that the FSA should make clear to banks that they are allowed to use their liquidity buffers in the event of a crisis — i.e. that they will not be expected to conform to liquidity requirements all the time — and that LIBOR should be reformed to reflect an actual market rate.

If this all sounds a bit vague, there is an important reason: this report is from the interim FPC — the legislation to give it actual powers has not yet been passed.

Deposit Rate Cut

Commentary suggests that the ECB’s mooted cut in its deposit rate should stop banks from “parking funds” at the central bank. It is important to be clear on what this means. The level of reserves held at the ECB is decided by the ECB, which increases or decreases its balance sheet and issues liabilities accordingly. What is at issue is the level of excess reserves. Reserves are “excess” if they are above the level that banks have to keep at the central bank for precautionary purposes, something that is determined by their size. Thus the level of excess reserves can be reduced by banks expanding their balance sheets (and thereby moving reserves from the “excess” to the “required” bucket without changing the level of total reserves at the central bank). The idea of reducing the deposit rate, then, is to give banks an incentive to expand by taking away the profits generated by their ECB deposits. This idea is coherent, but I am not sure it is good. Banks’ capital is in question, so taking away sources of profit is not an obvious thing to do, and the whole idea assumes that there is enough demand for loans for the banks to be able to expand — which, in a deleveraging environment combined with local recessions, is again far from obvious.

Hints of Chinese Action

In addition to the recent interest-rate cuts, there are anecdotal reports that the Chinese authorities are allowing some easing of property curbs in certain areas. Earlier in the year, such easing was quickly reversed by local governments that tried it; recently, according to Bloomberg, governments have introduced subsidies for buyers in Yangzhou, discounts on mortgages for first-time buyers in Beijing and an increase in the tax threshold on some purchases in Shanghai. It seems reasonable to believe that, while the government does want house prices to fall, it does not want sharp falls (after all, bureaucrats love stability) and will act to prevent them.


  • US personal spending 0% d.e. May.
  • US personal income 0.2% d.e. May.
  • US personal saving rate increased to 3.9% — more deleveraing and less spending.
  • US personal spending on durable goods (NOT the same as durable goods orders) 0.4%, an improvement on last month. This is a fairly good leading indicator and the part of the Personal Income and Outlays report that I watch most closely.
  • US revised Michigan sentiment 73.2 d.e. and had a big drop from last month’s post-crisis high. I suspect that the whole world held its breath last month because of the European crisis — and especially the Greek election — and that global data will improve in the short term as everyone starts to breathe again. The hard data for June may be pretty bad but the earliest indicators — sentiment surveys and jobless claims — may start to improve.
  • China PMI 50.2 b.e. and rose. China HSBC PMI 48.2. I am inclined to trust the HSBC number which seems to cohere better with other data.
  • Japan Tankan manufacturing -1 b.e. Non-manufacturing 8 b.e. Japanese data continue to surprise to the upside.
  • Swiss retail sales 6.2% YOY b.e. May. A good number but partly due to a flattering YOY comparison.
  • Eurozone final PMI 45.1, a slight upward revision from the flash estimate.
  • Italian unemployment fell unexpectedly to 10.1%.
  • UK PMI 48.6 b.e. and rose.
  • Eurozone unemployment was flat at 11%, May.
  • US Markit PMI 52.5 d.e.
  • US ISM PMI 49.7 d.e. and fell into contractionary territory for the first time since 2009.
  • Australia building approvals surged 27.3%, b.e., May. “The large increase in Dwelling Unit approvals in May 2012 was driven by a number of large private sector projects in New South Wales, Victoria, and the Australian Capital Territory.”
  • UK net lending to individuals 1.3bn b.e. May.
  • US factory orders 0.7% b.e. May.
  • US vehicle sales rose to 14.1m, b.e., June. This is a surprisingly good number (+17% YOY NSA) considering the drop in consumer sentiment and global worries about Greece and bodes well for consumer spending on durable goods.
  • Australia retail sales 0.5% b.e. May.
  • Eurozone final services PMI 51.3, revised down from flash estimate.
  • Eurozone retail sales 0.6% b.e. May.

Coming Up (while I am away)

  • BoE Meeting
  • ECB Meeting
  • US ISM non-manufacturing PMI
  • US Non-farm Payrolls
  • Japan current account
  • China CPI
  • China trade balance
  • US trade balance
  • US FOMC meeting minutes