Tensions between ECB and Germany intensify

April 12, 2016

FX News Today

European Outlook: Asian stock markets outside of China are mostly higher, led by a rebound in Japan, where markets benefited from a weaker Yen and the BoJ’s decision to tweak the calculation for negative rates, which underpinned bank stocks amid hopes that the negative rate portion of bank reserves will be lower than feared. Oil prices are off earlier highs, but the front end WTI future is holding above USD 40 per barrel. US stock futures are also moving higher, but UK futures are down, with the U.K. continuing to underperforming amid Brexit fears. Released overnight. BRC retail sales came in much weaker than expected and unexpectedly contracted, which will add to pressure on the FTSE 100 ahead of the release of March inflation data today.

Tensions between ECB and Germany intensify: Finance Minister Schaeuble’s unusually clear comments on ECB policy saying that “there is a growing understanding that excessive liquidity has become more a cause than a solution to the problem” a reflection of a growing agreement among German policy makers that it is time to publicly distance themselves from Draghi’s negative interest rates policy. With the right wing AFD, which originally was founded on an anti-EMU platform gaining more and more support and German savers enraged by dwindling returns on private retirement funds, they were lured into by a public campaign trying to reduce pressure on the PAYG pension system, Merkel is under pressure to at least be seen as trying to reign in Draghi’s spending spree. Not that Germany questions the ECB’s independence, rather as with the OMT program, there are increasing doubts that the ECB is acting within its mandate. Even if a court dispute between German and the ECB is highly unlikely with the ECB heavily relying on investor trust in Germany as the stability anchor of the Eurozone, an open conflict between the central bank and the Eurozone’s largest economy could easily rekindle the debt crisis once again.

Kaplan Speech: He remains skeptical about negative rates, which can hurt banking, money and commercial paper markets, and he hopes the U.S. will avoid that trap. He said the “living will” process necessary if onerous and challenging to big banks. He expects global energy supply to exceed demand through the end of this year, leading to more volatility in the oil-gas industry, including bankruptcies and more restructuring until H1 2017. (He is the president of the Dallas Fed and should know better than most). However, he does expect the headwinds from the strong dollar to fade. Kaplan does not expect planned rate hikes to shift the Treasury yield curve significantly, nor lead to Fed portfolio losses.

The Debate on NIRP heats up: The ongoing controversy over Negative Interest Rate Policy (NIRP) continued in several articles circulating, with IMF’s Largarde defending the utility of negative rates in a blog post that suggested that lending and risk taking will increase. But Bill Gross of Janus said in a Barron’s article that savers would move into cash and could in fact hoard savings to compensate for the lack of returns from pension and insurance funds, and that could result in their ultimate demise. Larry Fink of Blackrock agreed in the FT that in the case of negative rates savers will divert funds into more savings, rather than less. The WSJ also pointed out the underperformance of banks in this environment heading into peak earnings season for banks.

Main Macro Events Today

UK Consumer Price Index  Headline CPI is expected to tick higher, to +0.4% (median same) from 0.3% in the month previous. The core CPI reading is also seen nudging up, to +1.4% y/y from 1.3%. PPI is expected.

US Import and Export Prices March trade price data should show import prices up 1.6% with export prices down 0.2%. This follows February figures which had import prices down 0.3% and export prices down 0.4%. WTI prices improved in March which should help prop up import prices after a steady string of declines. Despite the increase, oil prices still remain at depressed levels so they could pose some continued downside risk.

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