How the ECB is Actually Hurting Banks

How the ECB is Actually Hurting Banks

SummaryEuropean bank stocks have experienced an alarming decline. The credit default swap and options market confirm the aforementioned fear.Negative rates might have a short-term negative impact on European financials.The European Central Bank (ECB) will take action if financial conditions deteriorate further.European bank stocks have been getting slammed. Concealed by Chinese Yuan and Federal Reserve headlines, European financials have secretly been having a terrible year.  Poster child European banks like Deutsche Bank and Credit Suisse are down nearly 30% and 40% respectively in the last six months—starting this year worse off than 2008. Bank stocks seem to be acting as if we are destined for another 2008 financial crisis or late 2011 European debt crisis. Are equity prices implying another crisis or is the macroeconomic environment just that bad?Poor Banking EconomicsIt’s not a good time to be a bank in Europe. The European Central Bank (ECB) will likely vote to cut interest rates further into negative territory at their next meeting. According to an anonymous ECB governor in a recent Reuters interview, “doing nothing in March is very unlikely…[and] a deposit rate cut is fairly undisputed.”The ECB has three main interest rate levers it is able to adjust, each with a specific function. The Main Refinancing Operations (MRO) rate, which issues the majority of capital to banks, is currently at a mere five basis points (bps). The deposit rate, used for overnight facilities with the Eurosystem, is at negative 30 bps. Finally, the marginal lending rate, the price at which banks can lend overnight credit to institutions from the Eurosystem, sits at 0.30%. The ECB can move a number of...
Myth: America Will End Up Like Japan

Myth: America Will End Up Like Japan

SummaryInflation rates in Japan and the U.S. are currently below central bank goals. Japan, however, is significantly below target.Negative rates have been a reality (or close reality in real terms) for a few countries.The proposed 200 bps sales tax increase in Japan will be a key variable to watch for in the FX and JGB market.“Whatever it takes” is an aggressive mandate for monetary policy—nothing short of historic. Momentous action is called for, however, in the case of Japan. The Bank of Japan (BOJ) is attempting to rescue the country from its decade long economic slump. Accordingly, Japanese central bankers have passed some of the most aggressive policy measures ever seen.  Despite these actions, Japan is still plagued with subpar inflation growth and is far from its consumer price index goal. Across the Pacific, the U.S. seems to be in a similar boat.Much like the BOJ, the Federal Reserve (the Fed) is still shooting for an elusive inflation figure, despite historically loose monetary policy. Janet Yellen’s board is looking for Core Personal Consumption Expenditure (PCE) to hit 1.5%-1.7% in 2016 and 2% in the long run. In the latest data release, PCE index year-over-year (YoY) came in at 0.58%. The trend is favorable, with last month’s figure being 14 bps lower, but current levels are still far from the Fed’s 1.5%-1.7% 2016 target. Interestingly enough, PCE less food and energy (Core PCE) is a lot closer to the Fed’s target. Core PCE YoY reached 1.41% in the same release. This could lead investors to believe that food and energy is preventing the Fed from tightening more aggressively. The Fed’s...