“The declining economic outlook and increasing political pressure are pushing central banks into more aggressive unconventional monetary policies.
“Simultaneously, fears are growing that such steps, especially negative interest rates, actually threaten the stability of the financial system. They risk setting off dangerous feedback loops in credit markets and the real economy, where the second and third-order effects are difficult to anticipate or control.”
“Mass-selling German newspaper Bild on Friday accused European Central Bank President Mario Draghi of “sucking dry” the bank accounts of Germany’s savers, a day after the ECB cut interest rates deeper into negative territory…
““Banks could soon pass on lower interest rates to even more customers,” Joachim Wuermeling, a board member of Germany’s central bank, the Bundesbank told Focus magazine.”
“…cheap debt has fueled growth in the United States for decades. But in Europe, corporate debt is in a very different place than it is stateside. As of August 1, a staggering 40% of investment grade corporate debt was yielding negative.
“And after the ECB’s new policy announcement this morning? That number’s guaranteed to grow.”
““A recession is threatening the German economy. The industry’s weakness is gradually spreading into other sectors of the economy, such as the logistics sector, which is one of the service providers,” said ifo economic affairs director Timo Wollmershäuser, commenting on the institute’s new forecast published on Thursday (12 September).”
“…the headline assumptions [in the event of a no-deal Brexit] are that there will be increases in the cost of fuel and food, possible shortages of medicine and potentially riots as a result of all of the above.
“The government’s rhetorical shield is that this is just the reasonable worst case scenario – which is a clever way of hiding that it is also their central forecast. Yes, it’s possible that it could be better – but it is equally possible it could be worse.”
“German Chancellor Angela Merkel’s government is watching with alarm the growing number of migrants reaching the Greek islands from Turkey.
“The swell of asylum seekers crossing the western Aegean Sea is a sign of trouble in the arrangements hashed out with Turkey that eventually staunched the flow of arrivals during the crisis of 2015 and 2016. A new influx, even if nowhere near the same scale, has the potential to stir up trouble for Merkel…”
“The world hasn’t seen such staggering numbers of people fleeing violence, persecution and desperation since World War II — and countries that had offered safe harbor are beginning to turn them away…
“The vast majority of displaced people flee not to wealthy Western countries, but to their neighbors. It’s there that efforts to curb protections are most acutely felt.”
“Argentine lawmakers on Thursday unanimously approved a draft emergency food law to free up resources for social programs amid a worsening economic crisis…
“Soaring inflation and rising poverty have stirred outrage at austerity measures introduced by center-right President Mauricio Macri’s government in order to comply with the terms of a record $57 billion IMF bailout.”
“…these aren’t normal times:
“Grim reports this week showed Australian firms and households deep in the doldrums, with little sign that recent Reserve Bank and government efforts are set to change that. Earlier data showed that retail sales actually went backwards in July.”
“Japan’s exports likely contracted at the fastest pace in more than three years in August, a Reuters poll showed on Friday, indicating increasing pressure on shipments as the economy is being hit by the U.S.-China trade war and slower global growth.
“Adding to the challenges policymakers face, Japan’s core consumer inflation is seen in the poll as slipping to the lowest level in more than two years.”
“The Bank of Japan is brainstorming ways to deepen negative interest rates at minimal cost, as it considers adopting it as a main policy response to a slowing economy and intensifying global risks, sources familiar with the bank’s thinking said.”
“Another shadow financier in India has defaulted on a debt repayment, signaling the nation’s yearlong credit crisis is far from abating.
“Altico Capital India Ltd., a non-banking finance company that focuses on lending to the real-estate sector, didn’t pay 199.7 million rupees ($2.8 million) of interest on borrowings from Dubai-based Mashreqbank PSC, Altico said in an exchange filing on Thursday.”
“The Trump administration may begin issuing 50-year “ultralong” bonds next year as the government seeks new ways to finance ballooning deficits and tries to take advantage of low interest rates.
“Treasury Secretary Steven Mnuchin said on Thursday that he had been studying whether there was sufficient market demand for a 50-year bond, which would overtake the 30-year bond as the longest-term debt that the government issues.”
“The finances of U.S. farmers continued to deteriorate, with 2.32% of all farmland loans in arrears at the end of June, up from 2.15% a year earlier and the highest share since 2013.
“Default rates on other agricultural loans accelerated to 1.82% from a recent low of just 0.77% back in 2015 and the highest since 2011.
“The other troubling trend was the increasing delinquency rates for credit cards and other consumer loans, which have been gently but consistently rising since 2015.”
“The yield curve was once just a wonky graph for academics and policymakers. But in recent years it has become a way to forecast looming recessions.
“The curve has helped predict every recession over the past 50 years. That means the curve accurately predicted even largely unforeseen downturns like the dot-com bubble of 2001 and the Great Recession in 2007.”
“Right now may be as good as it gets for the OPEC+ mission to shrink global oil inventories.
“This quarter’s contraction in stockpiles won’t last and next year they’ll start to expand without deeper cuts from the producer group. That’s the consensus view from the three big oil-forecasting agencies.”
“…in addition to the yield curve in the United States now being inverted, we’ve got a strange situation where as much as 16 trillion dollars — I repeat, 16 trillion dollars — of global bonds, a third of the global bond market, now trades at negative interest rates. So for instance in Germany, in order to have the privilege to lend to the government for 10 years, you have to actually pay the government something like half a percent a year for the next 10 years.
“At that point, you’re just looking for a safe place to put your money, right?
“You’re either looking for a safe place to put your money, or what you’re betting is that the interest rates are going to go even more negative. So you’ll get capital appreciation on those bonds. So the bond market is telling you one thing; both in the United States and globally we’re not simply going to have a recession, but likely a prolonged recession of a fairly severe type.
“And what is the stock market missing?
“No, well, the stock market could be thinking of something that has legitimately served them well in the past. This is that the central banks are there to bail them out…
“What is of concern to me is not simply that stock market prices are very high valuations, but it is that loans to risky borrowers have been made at very low interest rates. So because we’ve had a period of prolonged period of very low interest rates and very easy money, borrowers who shouldn’t have been in the market have actually borrowed at low interest rates.
“So Janet Yellen, for instance, is very concerned right now about the leverage bond market in the United States.
“It’s lending to very risky borrowers has now increased as much as $1.3 trillion, and that has been done at very low interest rates without the usual covenants or protections for the lenders.
“If things go wrong, we could have a lot of disruption in the financial market…”