NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among the posts this past week were items on ECB policy and what you should know about the Fed's latest Beige Book report.
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ECB's Placebo Policy Moves On
Originally published on Friday, June 6, at 8:03 a.m. EDT.
On June 5, the European Central Bank launched more aggressive monetary policy moves that are intended to revive European economic growth and to counter the threat of deflation.
- The repo rate was reduced by 10 basis points, to 0.15%.
- A negative deposit rate of -0.10% (from 0.00%) was established for banks depositing funds with the ECB, which is intended to provide an incentive for banks to lend.
- A new facility was established to provide up to 400 billion euros for banks to lend in the nonfinancial private sector.
- The sterilization of bond purchases (made at the beginning of the euro crisis) will be suspended.
- The ECB will begin to develop a plan to make purchases of asset-backed securities.
The current rate of inflation in the eurozone is a low +0.5%. Europe's economic recovery remains uneven. The May eurozone purchasing manager index for manufacturing moved lower to 52.2 from 53.4 in April. The composite PMI, which includes services and manufacturing, also declined in May from 54.0 to 53.5. The euro remains at about 1.36, and although down modestly from the previous ECB meeting, is still remains too high (according to many observers).
The ECB did not do anything substantive and unexpected. Money and credit in Europe is not growing, which is deflationary.
European bond yields, with the exception of some peripheral countries' bonds (Greece, Spain and Italy), are down only slightly, and the euro (the main barometer of determining the success of ECB policy) is materially unchanged for the week. European equities crept up only modestly in the week (+0.6% on the Stoxx 600 index), and Asian markets are down slightly. Thus, the markets are saying that the ECB delivered a consensuslike package, and that there should be no incremental growth/inflation from it.
It is my view that, similar to the last few quantitative easings by the Fed, these efforts will not necessarily have the intended impact of improving the transmission of credit.
- A negative interest rate on excess reserves is a fool's errand, as only 32 billion euros in excess reserves are held by the ECB (down from over 830 billion euros in July 2012).
- The European banking industry is years behind that of the U.S. It is capital-deficient and beset by bad assets and, as such, is only focused right now on shrinking balance sheets ahead of the asset-quality review.
- With regard to sterilization, money market rates have risen over the past six months, as banks have paid back the first LTRO program. This is not new stimulus; it is only an attempt to push back down bank-to-bank lending rates. (Over the past three months, the EONIA overnight rate has averaged 23 basis points compared with the one-year average of 15 basis points. And the three-month Euribor has been above the ECB's benchmark rate all year.)
- The new 400 billion euro targeted LTRO program is simply refilling the prior program. There is no assurance that the banks will even take the money.
- The asset purchase program will not occur anytime soon, as the regulatory structure is not yet in place. Moreover, the market is not big enough for the ECB to have an impact.
It has been more than two years since central bank President Mario Draghi said he would "do whatever it takes" to reduce the euro's value, improve the transmission of bank credit and put to bed deflationary fears.
To me, deflation (an "internal devaluation") might be the only way to restore competitiveness, perhaps through wage cuts and reduced living standards in the periphery. The Irish are used to suffering and have gotten on with it. Not so in Southern Europe.
Draghi delivered placebo policy changes that won't hurt but also won't help that much.
In essence, European and Asian markets have taken the Draghi-ECB moves in stride, while the U.S. has rejoiced, leading me to believe that hedge-hogger David Tepper might have been more responsible for the market's rally on June 5 than Draghi.
In my view, the U.S. stock market has overreacted to both the ECB's moves on Thursday and to Tepper's comments.
Beige Book Bullet Points
Originally published on Wednesday, June 4, at 2:34 p.m. EDT.
The Fed just released its second post-winter Beige Book. The economy is clearly recovering, but only modestly and at a rate of growth that is well below consensus expectations from year-end 2013. However, first-half, real GDP growth still is likely to increase by only about 2%.
Here is a summary of the important bullet points and statements contained in the Beige Book:
- "All 12 Districts report that economic activity expanded during the current reporting period. The pace of growth was characterized as moderate or modest."
- "Consumer spending expanded across almost all Districts, to varying degrees. Non-auto retail sales grew at a moderate pace: Although improved weather generally gave a boost to business."
- "Increasingly strong new vehicle sales were reported by more than half the Districts, with most other regions seeing steady sales"
- "Activity in the service sector, excluding finance, grew across most reporting Districts."
- "Manufacturing activity expanded throughout the nation, and at an increasingly strong pace in a number of Districts."
- "Residential real estate activity was mixed across the country. Residential construction activity was mixed."
- "Markets for both condos and apartment rentals were mostly robust...Multi-family construction remained particularly robust."
- "Both non-residential construction activity and CRE markets were generally steady to stronger since the last report."
- "Overall lending activity increased throughout the nation."
- "Labor market conditions generally strengthened in the latest reporting period...and several Districts reporting shortages of skilled workers. In most Districts, wage increases have remained generally subdued." But "wage increases were observed in IT, engineering, professional services and some skilled trades."
- "Prices of both inputs and finished goods and services were mostly steady to up slightly. However, high or rising prices for some ag commodities, construction materials, energy products and precious metals were cited by some Districts."