Negative Interest Rates In Europe, Depressing Retail Sales And Plunging U.S. Imports, Q.E. Back On The Table (#GotBitcoin?)
Abrupt decline in inbound container volume at California’s big gateways came after shippers pulled forward purchases from Asia ahead of potential new tariffs. Negative Interest Rates In Europe, Depressing Retail Sales And Plunging U.S. Imports, Q.E. Back On The Table (#GotBitcoin?)
U.S. Seaborne Imports to Los Angeles, Long Beach Plunged in February
Seaborne imports into the biggest U.S. gateways for Asia trade fell sharply in February, halting a monthslong shipping surge driven by strong consumer demand and a rush by companies to bring goods into the country ahead of potential new tariffs.
Loaded container imports into the ports of Los Angeles and Long Beach declined a combined 10.2% last month from the same month a year ago. The gateways in February handled 651,180 20-foot equivalent units, a common measure of container shipments, down nearly 75,000 fewer containers from February 2018.
The drop came during the annual pause in China’s manufacturing during the Lunar New Year celebration, when factories typically shut down for several weeks. It also followed a boom in imports into Los Angeles and Long Beach that began early last summer as new trans-Pacific tariffs loomed amid growing trade tensions between the U.S. and China.
The Port of Oakland also reported a 5% decline in imports in February from the year before.
Retailers are “taking a break from the rush to bring merchandise in ahead of tariff hikes now that the increase that was scheduled for March has been delayed,” Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation, said in a statement. “We are hoping that the delay is permanent and, better yet, that tariffs of the past year will be removed entirely.”
The import surge at the California gateways reached a peak late in the year after U.S. trade officials announced a plan in September to raise tariffs on $200 billion in Chinese imports by 25% on Jan. 1. That was later pushed back to March 2 and now has been postponed while the U.S. and China seek to strike a new trade pact.
During the last three months of 2018, import volume at the ports of Los Angeles and Long Beach rose 9% over the same period a year earlier, and the growth continued in January, long after the holidays that typically trigger stronger shipping volumes in the fall.
Walter Kemmsies, an economist specializing in ports and infrastructure at real-estate firm Jones Lang LaSalle Inc., said most of the February decline was the result of supply chains already stuffed with goods, leaving an “overhang from the rush to overhang to avoid tariffs.”
“Chinese New Year normally gives you a little dip, but it’s usually just a 5 or 6% drop-off from January to February,” said Mr. Kemmsies. Inbound volumes into Los Angeles fell 18.2% from January to February.
Combined exports at the Southern California ports also fell 13.9% in February from a year ago, including a 19.6% decline at the Port of Long Beach to the lowest level since January 2015. Oakland’s export volumes dropped 8.2% from a year ago in February.
A Really Bad Retail Sales Report
The January retail sales report wasn’t just less strong than it appeared; it was downright weak.
Scratch its surface and it is quickly apparent that the January retail sales report wasn’t as good as it appeared at first glance. Dig a little deeper and it actually looks awful.
The Commerce Department on Monday reported that retail sales rose a seasonally adjusted 0.2% in January from December, better than the flat reading that economists expected. A measure excluding sales at motor vehicle dealers, gasoline stations, hardware stores and restaurants—the so-called control group economists use to track gross domestic product—rose a sharp 1.1%.
But there were substantial revisions to December’s already weak figures. December control sales, initially reported down 1.7%, fell 2.3% instead. November sales were revised lower as well, so fourth-quarter GDP probably grew at a slower pace than the 2.6% the Commerce Department reported last month. Even worse, because the December sales drop lowers the starting point for consumer spending this year, first-quarter GDP growth is shaping up to be even weaker. Goldman Sachs economists on Monday lowered their first-quarter GDP growth estimate to 0.5% from 0.9%, for example.
What makes Monday’s report even more troubling is that since it includes holiday spending, December is the most important month for retail sales. January is one of the least. The Commerce Department’s seasonal adjustment factors take this into account, so the rebound in January sales was even less than met the eye.
A rebound in the stock market, the end of the government shutdown and better weather have given people more reasons to spend, so there is hope that there has been some improvement. Until investors see evidence of that, though, they should lower their expectations.
Central Banks Play a Game of Risk Management
Economic-policy makers rush to reduce odds of recession, with limited tool kits.
The world’s central banks are engaged in a major policy reversal to prevent the world economy from sinking into unexpected recession.
Alarmed by an economic slowdown and stress last year in financial markets, they are calling off interest-rate increases sooner than expected and in some cases easing monetary policy.
In many cases, the central bankers are boxed in, with few policy tools available to cushion their economies.
Collectively, though, economists say the central bankers have reduced market risks and helped ease financial conditions in a way that should keep expansions—nearly a decadelong or older in the U.S. and China, while fragile and short-lived in Europe and Japan—going through 2019.
It started with the Federal Reserve. Six months ago, Fed officials thought they would raise short-term interest rates three times in 2019 on the way toward a policy rate near 3.5% in 2020. Fed officials recently signaled they have paused for now, with short-term rates just below 2.5%. Their actions and words strongly suggest they could be done altogether.
The Fed’s reversal after last year’s market turbulence changes the contours of the expansion and helps preserve an outlook for continued growth, said Goldman Sachs Chief Economist Jan Hatzius.
“The Fed was trying to tighten financial conditions gradually (last year) and then it got a much bigger and more rapid tightening than it expected,” he said. He now sees a sharp drag on U.S. economic growth early this year and gradual improvement as the year progresses, rather than the steady slowing he previously expected.
“It could be a year from now we’ll find this was a pause that ultimately doesn’t really change the outcome that much,” he said.
With the Fed taking an easier stance, other central banks have less pressure to raise rates. J.P. Morgan economists see rates 2 percentage points lower in Brazil than they expected a few months ago, and they see India cutting rates. Australia is expected to reduce rates, too, and rate increases are expected to be put off in Canada and the U.K.
“We’re clearly seeing a dovish tilt that is broadening out,” said J.P. Morgan’s chief economist, Bruce Kasman.
Europe and Japan are evidence that the central bankers have little room for error. Last week, the European Central Bank reduced its 2019 projection for inflation to 1.2% from 1.6%, well below its 2% target. It also cut its growth forecast to 1.1% from 1.7%.
In normal times, a central bank would cut interest rates when confronted with such a big inflation miss and deteriorating growth outlook. But the ECB’s target short-term interest rate is already negative and the scope to restart a bond-buying program that ended three months ago constrained. The ECB said it would put off rate increases and expanded a special bank-lending program, but Mr. Kasman found the move inadequate for the moment.
“The ECB is moving here, but its limited toolbox makes it quite vulnerable,” he said.
Because the central bankers have limited room for error, they are more sensitive than they were in decades past to signs that growth or inflation might be slowing more than expected. They call it a “risk management” mindset. They have unlimited space to fight accelerating inflation with higher interest rates and little-to-no space to fight slowing inflation with lower rates. Thus they are doing whatever it takes to avoid such shortfalls.
“Seeing how central banks have adjusted fairly rapidly to the data coming in does reduce some of the downside risks,” said Kristin Forbes, a professor at the Massachusetts Institute of Technology and former member of the Bank of England’s Monetary Policy Committee.
In a paper presented at the Brookings Institution last week, former U.S. Treasury Secretary and White House adviser Lawrence Summers suggested this risk imbalance could now be an entrenched feature of the economic landscape. A neutral interest rate that neither stimulates the economy nor constrains it is 3 percentage points lower than it was a generation ago, he said, putting it closer to zero on a regular basis. That means central banks could be living in a state of high alert for years.
In some respects, the situation mirrors a global slowdown just three years ago that sparked synchronized policy easing by global central banks. The Fed then also led the way, scrapping plans to raise rates several times, instead lifting rates just once at the end of 2016.
Today’s episode is complicated because it involves a broad range of political uncertainties, such as the Trump administration’s confrontations with China over trade and the U.K.’s plan to leave the European Union.
“These are a different kettle of fish from 2016,” said Lewis Alexander, chief U.S. economist for Nomura Securities. “The very stable international policy regime that we’ve been living with for decades may not be as stable as we thought it was.”
Add China’s slowdown to the list of uncertainties for the global outlook. Its policy makers are trying to stimulate growth, too, with an emphasis on fiscal policy. But they are also constrained, fearing that massive stimulus—what they call “flood irrigation” from years past—could lead to excessive borrowing that damages China’s economy in the long run.
In short, the risk may be diminished after the latest reversal by central banks, but it’s hardly gone.
Europe’s Most Important Bond Edges Back Toward Negative Territory
Germany’s 10-year bond yielded as little as a microscopic 0.04% recently, as investors fret about Europe’s growth prospects.
Investors have driven the eurozone’s most closely followed government bond yield close to negative territory for the first time since 2016, underscoring the increasingly bleak outlook for the European economy.
Germany’s 10-year government bonds, known as bunds, yielded as little as 0.04% on Friday, a microscopic return for investors and the lowest level since October 2016 when the region was still emerging from a protracted sovereign-debt crisis.
Sending the yields lower last week were fears that Europe’s economy has slipped back into slow-growth mode, exacerbated by slack demand for European goods abroad and political gridlock at home. The European Central Bank slashed its growth forecasts for this year to 1.1% from 1.7% and all but ruled out raising its benchmark interest rate, currently negative, before the start of next decade at the earliest.
“We’re not going to do any monetary-policy normalization for the next two years,” said Samy Chaar, chief economist for fund manager and private bank Lombard Odier in Geneva. “All open economies have hit a brick wall.”
The realization that negative policy rates are here to stay led investors to pile into bunds and other low-risk government bonds. Beyond Germany, the yield on equivalent French debt drifted to 0.413% on Friday, also its lowest since 2016. That has sent borrowing costs for European corporations lower as well, with the ICE Bank of America Merrill Lynch Europe index yield falling below 5% from 5.5% at the end of last year.
Shorter-term European government bonds never emerged from negative territory after the ECB first experimented with below-zero policy rates in 2016 as a way to dislodge the economy from persistently slow growth. Over 22% of overall debt in the world is still negatively yielding, up from 13% at the beginning of 2016. Japan, Switzerland and Denmark also have negative interest rates.
“Most of the yield curve is already underwater,” said Peter Dixon, an economist at Commerzbank. “The 10-year is the last tip of the iceberg.” He added: “The simple fact is that you’re paying the government to take on their debt.”
Investors buy negative-yielding debt in some cases because they have no other choice. Bond funds follow indexes that include the bonds. Long-term holders like insurers need the bonds to keep capital safe in order to pay expected liabilities. And large bank depositors may find paying the negative interest rate is less than the charges to keep cash as a bank deposit.
Investors can also gain on negative yielding debt if yields continue to go even lower, as the price of the bond increases inversely to the yield. Such capital-appreciation trades were highly profitable in early 2016, when the ECB first unveiled negative rates.
Subzero yields have weighed particularly on the region’s banks, which make money by lending at a greater interest rate than is paid to borrowers. In sign that investors remain skeptical about their profitability, the Euro Stoxx Bank index trades for just 60% of the underlying banks’ book value. Almost all big U.S. banks, which enjoy a positive rate-environment, all trade for more than book value.
Germany is seen as an investor haven thanks to the government’s strong fiscal position. It has enjoyed lower rates than EU peers for years. It runs a budget surplus and its debt as a percentage of the size of the economy has fallen in the past few years, even as it has risen for France and Italy.
“The fact that you have got this expansionary budget being run in Italy and in France increases the preference for German debt for people that are quite risk averse,” said David Slater, a portfolio manager at Trium Capital, the London hedge fund.
Germany bonds are also a scarce commodity. Germany, the Netherlands and Luxembourg are the only AAA-rated government debt in the eurozone. European regulations force banks and insurance companies to stock up on the relatively safe assets.
“It is fundamentally that the proportion of AAA assets in the eurozone is out of whack with what is required by the size of the economy,” said Lyn Graham-Taylor, fixed-income strategist at Rabobank.
At the IMF, Germany Comes Under Pressure To Stimulate Growth
The IMF, backed by the U.S., has pressed Germany and others with budget surpluses to cut taxes or raise spending to prop up growth.
With the global economy slowing and showing signs it may need support, economists are pointing fingers at Germany and a few other countries that are in a position to provide a lot of stimulus but are choosing not to.
What stimulus measures policy makers can use to support their flagging economies was a key issue during weekend meetings at the International Monetary Fund in Washington. In its annual report on global fiscal policies, the IMF singled out Germany, Korea and Australia as places where fiscal stimulus could make sense. Earlier this month, the IMF called on Switzerland to ramp up public spending.
The IMF, backed by the U.S., has pressed Germany and others with budget surpluses to cut taxes or raise spending to prop up growth. Countries with a budget surplus “should certainly make use of it and have the space to invest and to participate in the economic development and growth,” IMF Managing Director Christine Lagarde said, “but not enough has been done on that front.”
Treasury Secretary Steven Mnuchin said he agreed with the IMF’s stance on surplus countries such as Germany. The U.S. is now running large deficits.
The idea behind debt-financed stimulus is that when economies are weak, governments substitute for a lack of private demand through spending or tax cuts. In times of intense stress such as the global financial crisis a decade ago, economists agree that governments should do all they can to prop up growth.
But using large-scale fiscal stimulus to address an economic soft patch has met with resistance from countries like Germany that run a conservative economic policy.
Germany’s finance minister, Olaf Scholz, fired back at criticisms, pointing to his nation’s increased public investment, reduced taxes and higher support for low-income families.
“It would be a very nice service if you could tell the rest of the world that they are demanding something we already did,” he said to a reporter at a press conference Friday. Germany’s stable finances put it in a better position to respond to the next recession, he said, and the current global risks aren’t Germany’s finances but rather “man-made” ones including Brexit and trade disputes.
Korea, meantime, runs an annual budget surplus while Australia is expected to swing to a surplus in the coming years. Unlike in Europe, these economies don’t appear to be in need of much stimulus, and their central banks have scope to cut interest rates if necessary.
Germany and Switzerland are using annual surpluses to cut debt and prepare for expected budget strains from future retirees. Germany’s position is the most relevant among surplus countries given its dominant role in European growth and politics.
If Germany were to launch a big stimulus program, it could encourage deficit countries like France and Italy to ease off measures to bring their budgets closer to balance. European rules set a ceiling on deficits at 3% of gross domestic product, though exceptions are made in times of stress. The U.S. has no such limit.
Germany’s export-dependent economy contracted in the third quarter of last year and was flat in the fourth. A string of weak manufacturing figures suggests it may contract again in the first half of this year. That soft patch will affect the 19-member eurozone, where Germany is the biggest member, and ripple across non-euro countries like Switzerland that rely on Europe for exports.
China’s economic slowdown “has hit the Germany economy hard, and there is a good case for using fiscal policy to smooth [the] adjustment,” said Ken Rogoff, a professor at Harvard University, noting Germany’s “huge latitude” from its low public debt, which equals less than 60% of gross domestic product and could shrink to less than 50%, by 2022 according to IMF estimates.
Germany has run annual surpluses since 2014 and is expected to do so through 2024, according to the IMF. Tax revenues have increased 8% since 2017, faster than welfare spending, and working Germans today pay the second highest level of income tax of all members of the Organization for Economic Cooperation and Development, behind only Belgium.
The U.S. position is in stark contrast to Germany’s despite facing similar problems with old-age spending. The government has pumped the U.S. economy with tax cuts and higher spending with the aim of generating 3% annual GDP growth rates. Annual deficits are over 4% of GDP.
The hope is that by expanding the size of the economy, the U.S. will be in a better position to service its debt down the road. The usual side effects of stimulus—higher bond yields and rising inflation—have failed to materialize, strengthening the argument of the stimulus camp and weakening Germany’s view that it’s best to keep the powder dry for the next recession.
Germany is “currently learning the hard way that they are the only country around playing according to these rules,” said Carsten Brzeski, an economist at ING Bank.
Greece, Once in Crisis, Joins Negative-Rates Club
Debt-laden country sells bonds yielding less than 0% for the first time.
Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields.
The Greek government issued €487.5 million ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%.
The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region. That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier.
The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt. The falling borrowing costs in recent months are a sign that Greece is steadily becoming just another eurozone country in investors’ eyes, after years when its survival in the common currency was in doubt.
“The general monetary-policy environment, not only in Europe but globally, helps issuers that have more debt on their balance sheet,” said Andrey Kuznetsov, senior portfolio manager at Hermes Investment Management. “The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk.”
The ECB took its key benchmark further into negative territory last month as it reduced the interest rate by one-tenth of a percentage point, to minus-0.5%. The monetary authority also launched a sweeping package of bond purchases as concerns about the health of the eurozone economy persist, laying the groundwork for an extended period of easy money.
While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest. Germany, for example, sold 30-year debt at a negative yield for the first time in August.
The yield on the government debt has tracked improvements in the Greek economy, suggesting that debtholders are “not as worried they’re going to lose money as they were in the past,” according to Lefteris Farmakis, a strategist at UBS.
Greece’s economy has been growing at around 2% a year lately, but remains deeply depressed after shrinking by over one-quarter during its financial crisis. Under the bailout program, the country was forced to enact drastic fiscal retrenchment in exchange for loans from other eurozone countries and the International Monetary Fund.
The election of a pro-business, center-right government under Prime Minister Kyriakos Mitsotakis this July has further contributed to a sense that normality is returning.
Still, Mr. Mitsotakis’s ability to loosen crisis-era austerity by cutting taxes remains constrained by the insistence of Greece’s German-led creditors that Athens continue to run budget surpluses.
Doubts remain over the sustainability of Greece’s debt in the long term, because its huge, cheap bailout loans from eurozone governments must eventually be replaced with market financing at uncertain cost. Most investors believe Germany and others won’t let Greece fall back into a crisis and will delay the loans’ repayment if necessary.
“If Greece continues to do well and credit risk continues to go down, you could see rates go even more negative,” Mr. Farmakis said.
Greece’s first issuance after exiting the bailout program, in January, saw the debt office attract demand in excess of €10 billion for a €2.5 billion fundraising round.
Wednesday’s issuance comes a day after Greece raised €1.5 billion from the sale of its existing March 2029 bonds at a yield of 1.50%. That marked a record low cost for its 10-year debt.
“The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk,” Mr. Kuznetsov said.
U.S. Retail Sales Fell in September
Sales fell 0.3% from August in first monthly decline since February.
American shoppers pulled back on spending in September, signaling a key support for the U.S. economy this year could be softening amid a broader global economic slowdown.
Retail sales—a measure of purchases at stores, at restaurants and online—decreased a seasonally adjusted 0.3% in September from a month earlier, the first monthly decline since February, the Commerce Department said Wednesday. Excluding vehicles and gasoline, categories that can be volatile, September retail sales were flat.
Wednesday’s report suggested consumer spending was on less solid footing amid concerns that trade tensions are weighing on the global economy and dampening consumers’ outlook. Consumer spending is the main driver of the U.S. economy, accounting for more than two-thirds of economic output.
“This morning’s report forces eternal optimists to face the possibility household spending may be moderating along with a decline in fundamentals,” Lindsey Piegza, Stifel chief economist, wrote in a note to clients.
September’s decrease in retail sales was driven in part by a 0.9% decline in spending on vehicles, which reflects a pullback from a strong 1.9% gain in August. Lower fuel prices weighed on sales at gasoline stations, which fell 0.7%.
Some economists said the drop in vehicle and gasoline sales paints a more mixed picture than the decline in the headline retail sales number would suggest.
Lower gas prices “aren’t a negative for consumers. That’s actually positive,” said David Berson, chief economist at Nationwide.
He noted that unit vehicle sales rose in September, citing figures from Autodata, in contrast to the dollar decline in vehicle sales reflected in Wednesday’s report.
Sales at nonstore retailers—a proxy measure for online retail sales—fell 0.3% in September, the first decline since December 2018 and one that Mr. Berson characterized as rare.
He said he would need to see “a lot more than one month of data, particularly one month of data that has all these anomalies,” before becoming overly concerned about a slowdown in consumer spending.
Consumers have been buoyed by an unemployment rate at a half-century low and prices that have risen modestly despite a U.S.-China trade war that only recently showed signs of easing. The National Association of Home Builders said Wednesday its housing-market index rose three points in October, to 71 from a revised level of 68 in September, reflecting an increase in U.S. home-builder confidence.
Retail sales can be volatile from month to month, and the broader trend this year has shown steady growth. They rose in August by a revised 0.6%, more than previously estimated. Sales increased 1.5% in the July-through-September period compared with the previous three months.
Yet, September’s slowdown in retail sales followed recent data that have suggested uncertainties around trade are weighing on other parts of the global economy. Personal-consumption expenditures—a separate measure of U.S. consumer spending—slowed more than expected in August. Manufacturing- and service-sector activity in the U.S. and eurozone has also seen a slowdown.
Forecasting firm Macroeconomic Advisers predicted U.S. gross domestic product grew at a 1.3% seasonally adjusted annual pace in the third quarter, compared with a 2.0% annual rate in the second quarter and a 3.1% pace in the first.
Trey Kraus, owner and president at Carltons Men’s and Women’s Apparel in Rehoboth Beach, Del., said he raised prices on almost every item in his store because of U.S. tariffs placed on Chinese imports. The store carries upscale clothing, and Mr. Kraus said the higher prices have deterred some of his customers from buying multiple items at once.
“Even though our business is up year over year, without the [price] increases, I would’ve anticipated five to 10% more in volume than what we are experiencing,” Mr. Kraus said.
Still, he characterized the store’s foot traffic as strong and said he has an optimistic outlook into the first quarter of 2020.
“I believe consumer confidence is still high in spite of a lot of the news that’s out there,” he said. “I don’t know what the statistics say, but that’s what I’m experiencing.”
A Pioneer of Negative Rates Pauses the Experiment
Sweden’s central bank, the first to apply negative rates on deposits, moves key rate back up to zero.
Sweden’s central bank, one of the pioneers in wielding negative interest rates, became the first to end that policy Thursday, a move closely watched by other institutions that have resorted to what was supposed to be a radical and short-lived measure.
In 2009, the Riksbank, the world’s oldest central bank, became the first to charge commercial banks to hold deposits rather than pay them interest. In 2015, it lowered its key policy rate below zero, following a similar move by the European Central Bank the year before.
On Thursday, the Riksbank raised the key rate to zero from minus 0.25%. The bank moved because a majority of its policy makers expect inflation to be close to its 2% target over the coming years. Some policy makers have also become more concerned that a longer period of negative interest rates could lead businesses and households to take on too much debt, or force banks to charge to accept deposits, which could lead to a rush into cash.
But it signaled caution, indicating it has no plans to raise its key rate further in the coming year. Underlining that caution, two of the six members of the executive board— Anna Breman and Per Jansson —opposed the move, preferring to wait until it is clear that the weak economic growth forecast by the central bank for coming years won’t pull inflation down.
With a similar focus on inflation, policy makers around the world are watching the broader impact of the Swedish experience, where subzero rates have stimulated the economy but have also driven household debt higher and weakened the country’s currency, the krona.
Most other central banks have abandoned plans to tighten policy as growth slowed this year, with both the U.S. Federal Reserve and the ECB reversing course to provide more, not less stimulus.
In the eurozone, negative rates are exceedingly controversial in countries like Germany, where many fear they keep unproductive companies alive, hurt bank profits and subsidize profligate governments by making debt extremely cheap.
The ECB’s policy-making committee is deeply divided over the efficacy of negative rates, with some arguing their impact has long waned and could become counterproductive.
The Bank of Japan introduced negative rates in early 2016 as part of its long struggle to raise inflation. In the U.S., President Trump has sometimes urged the Federal Reserve to adopt a negative policy rate.
The Riksbank’s move means it is the first to leave negative rates behind since they became a more common tool for central banks from 2014. Denmark’s central bank briefly raised its then negative key rate above zero in early 2014, before dropping it back below zero later that year in response to the ECB’s move.
Unlike its peers, Denmark’s central bank focuses on keeping the rate of exchange of its currency against the euro steady. That makes its interest rate movements less instructive for other central banks that allow their currencies to float and aim to steady the inflation rate.
“All central banks watch each other,” said Laurence Boone, chief economist at the Organization for Economic Cooperation and Development. “I don’t think negative rates have ever been seen as there to stay forever.”
By discouraging commercial banks from parking their money at central banks, negative rates prod financial institutions to lend at low cost to other banks, businesses and consumers, in turn pushing people to borrow more, spend more and save less. Negative rates can also weaken the national currency, delivering a boost to exports and increasing prices of imported goods to fuel inflation.
That dynamic has partly worked in Sweden, helping to boost growth and employment. Swedish economic growth surged in 2015, and remained above that of the neighboring eurozone in most subsequent years, while its jobless rate has edged lower.
Swedish economic growth surged in 2015 to 4.4%, then cooled to 2.4% in both 2016 and 2017, and 2.2% last year.
Subzero rates have also pushed more money into equities and bonds, with holdings in mutual funds reaching all-time highs since rates went negative, said Gustav Sjöholm, savings economist at the Swedish Investment Fund Association.
As inflation has picked up and the interest paid on bank deposits has fallen, Eric Entrena, an administrator in the Swedish school system, has sunk more money into stocks. “If you have inflation of 2%, you will have 2% less money,” says Mr. Entrena, 45. “What I’m trying to do is buy shares.”
House prices also felt the effects of negative interest rates, although a shortage of homes and low borrowing costs had been pushing prices higher even before 2015.
At the same time, private debt in Sweden climbed to 285.7% of annual economic output in 2018 from 273.8% in 2015, according to OECD figures.
Among the OECD’s 36 members, it was higher only in Ireland, the Netherlands and Luxembourg. But in Ireland and the Netherlands, debt was falling. In the U.S., private-sector debt was almost unchanged over that period, edging up to 211.8% of gross domestic product from 211.3%.
The decision to end negative rates has stirred a debate over whether the Riksbank’s primary policy goal should be keeping inflation steady.
The inflation targeted by the central bank has picked up since interest rates went negative, to 1.7% in November 2017 from 0.6% in January 2015.
“It can’t always be justified to push inflation up to the target level when it can lead to imbalances and create risks,” said Kerstin Hallsten, chief economist at the Industrial Employers Association, who left the central bank in 2018 after 26 years.
As in other parts of Europe where central banks have adopted negative rates, critics of the policy say the narrowness of its inflation goal prevents the Riksbank from taking account of its potentially harmful side effects, such as higher debt levels and a weaker currency.
But another group of critics worries that the central bank is raising rates just as signs are emerging that the economy is slowing on the back of falling demand for the country’s exports, which means there is a risk that inflation will fall back next year.
“The problem is instead that it might be perceived as the Riksbank deviating from what it normally does: designing monetary policy so that it is always very clear that the inflation target is the point of departure,” said the Riksbank’s Mr. Jansson, in a speech earlier this month.
Some of the loudest complaints about the Riksbank’s policy have focused on the weakening of the country’s currency, the krona, since negative rates were introduced.
Johannes Medlock is a 46-year-old advertising professional who travels to the U.K. regularly, and the U.S. occasionally. In recent years, he has seen the cost of those trips rise.
“I was very aware of it,” he said of a recent trip to the U.K. “I noticed a big difference.”
Policy makers’ interest in the impact of negative rates is high because many expect them to be a tool to combat future recessions.
Economists expect the so-called “equilibrium” real rate of interest below which borrowing and inflation surge to be lower than in the past. That is because, as populations age, more people save, driving down interest rates.
As a result, periods in which the equilibrium rate is so low that central banks could only match it by moving their key rates below zero may become more common, particularly in downturns.
With Negative Rates, Homeowners In Europe Are Paid To Borrow
Covid-19 pushes benchmarks deeper into negative territory, widening the pool of mortgage holders who receive interest.
aula Cristina Santos has a dream mortgage: The bank pays her.
Her interest rate fluctuates, but right now it is around minus 0.25%. So every month, Ms. Santos’s lender, Banco BPI SA, deposits in her account interest on the 320,000-euro mortgage, equivalent to roughly $380,000, she took out in 2008. In March, she received around $45. She is still paying principal on the loan.
Ms. Santos’s upside-down relationship with her lender started years ago when the European Central Bank cut interest rates to below zero to reignite the continent’s frail economy in the midst of a sovereign-debt crisis.
The negative rates helped everyone get cheap financing, from governments to small companies. It gave an incentive to households to borrow and spend. And it broke the basic rule of credit, allowing banks to owe money to borrowers.
Ms. Santos’s case was supposed to be rare and mostly over by now. After the ECB cut interest rates to below zero in 2014, economies in the eurozone improved and expectations were that rates would rise in a few years. But the coronavirus pandemic changed all that.
As economic pain in Europe drags on, the negative rates remain—and they are getting lower. As a result, more borrowers in Portugal as well as in Denmark, where interest rates turned negative in 2012, are finding themselves in the unusual position of receiving interest on their loans.
“When I took the mortgage, I never imagined this scenario, and neither did the bank,” said Ms. Santos, a 44-year-old business consultant.
Deco, a Lisbon-based consumer-rights group that in 2019 estimated that rates had turned negative on more than 30,000 mortgage contracts in Portugal, said the figure has likely more than doubled since then.
Many European borrowers have variable-rate mortgages tied to interest-rate benchmarks. Like most in Portugal, Ms. Santos’s is tied to Euribor, which is based on how much it costs European banks to borrow from each other. She pays a fixed 0.29% on top of the three-month Euribor rate.
When she took out the mortgage in 2008, three-month Euribor was close to 5%. It has been falling in recent months and is now near a record low, at minus 0.54%.
Portugal’s state-owned Caixa Geral de Depósitos SA said about 12% of its mortgage contracts currently carry negative rates. The number of such contracts rose by 50% last year, according to a person familiar with the situation. Ms. Santos’s bank, BPI, said it has so far paid €1 million in interest on mortgage contracts to an undisclosed number of customers.
Spain, where most mortgages are also linked to Euribor, faced a similar situation. But the country passed a law that prevents rates from going below zero. Portugal did the opposite, passing a bill in 2018 that requires banks to reflect negative rates.
“In the event that the decline in interest rates exceeds the mortgage spread, the client would not pay interest, but in no case [would the bank] pay in favor of the borrower,” said a spokesman for Banco Bilbao Vizcaya Argentaria SA, one of Spain’s largest lenders.
There are no official figures available on how many mortgages are currently carrying a zero interest rate in Spain. Banks have declined to disclose their numbers.
In Denmark, more borrowers have seen their rates turn negative, although in most cases they are still paying their banks because of an administration fee charge.
There, mortgages aren’t directly financed by the banks, which don’t set their terms. Instead, they serve as a type of intermediary, selling bonds to investors at a specific rate, lending the same amount to the borrower for the same rate.
Nykredit, Denmark’s biggest mortgage lender, said more than 50% of its loans with an interest period of up to 10 years have a negative interest rate before the fee. That proportion is rising because mortgages tend to have their rates adjusted every few years.
That is the case for Claus Johansen, 41, who works in Nykredit’s mortgage department. In 2016, he took on a five-year adjustable-rate mortgage for 1.2 million Danish kroner, equivalent to roughly $190,000, to buy a house north of Copenhagen.
His interest repayments for the first five years were set at 0.06%. In January of this year, the rate was revised to minus 0.26%, which is subtracted from a 0.6% administration fee he has to pay the bank.
“It’s odd, but negative rates have been around for so many years, we just got used to it,” Mr. Johansen said.
A flip side to borrowers receiving interest from their lenders is that banks in Denmark and elsewhere have started charging customers for their deposits, saying they can no longer absorb the negative rates their central bank charges them. Mr. Johansen said he keeps his account balance under the threshold at which his bank would start charging him.
In Lisbon, Ms. Santos said that while it is great to receive interest from her bank, her situation overall isn’t better off because BPI has sharply cut the interest it offered on her business deposit account in recent years, to close to zero, from around 3%. Her plans to buy a new house are on hold because BPI is now charging a much higher spread on new mortgages, to avoid falling into the negative-rates trap again.
“We wanted to move out of the city center, but it is hard to leave such a good mortgage deal behind,” Ms. Santos said.
‘Why Am I Holding This?’ Saying Bye To Europe’s Negative Yields
* Region’s Negative-Yielding Debt Pile Is Down A Third From Peak
* Repricing Comes As Investors Brace For Tighter Monetary Policy
On a recent visit to the United Arab Emirates, European Commission Director-General Gert Jan Koopman said he “had a pretty difficult time explaining” to investors why they should be purchasing assets in Europe that yield less than zero. Soon, he might not need to.
The amount of debt in the euro-area with a negative yield has dropped by more than a third from a peak in 2020. In a sign of the broader repricing that’s afoot, the yield on German bunds, the region’s paragon of safety, briefly rose above zero for the first time in three years this week.
It comes as traders brace for the gradual end to Europe’s era of ultra-loose ultra-lose monetary policy — super-charged to help the economy weather the pandemic. If sustained, the march higher in yields would be a sea change for asset managers, who for years has been forced to venture into riskier assets to lock in returns.
“The higher the yield, the better,” said Mark Healy, a portfolio manager at AXA Investment Managers. “I never liked buying something with a negative yield.” He expects yields to rise further during the course of 2022, giving investors an opportunity to put money to work in Europe again.
Money market are now wagering the ECB will raise its deposit rate for the first time in 11 years in October, and bring it to zero by the end of next year, from minus 0.5% currently. That’s among the most bearish positioning since 2015.
Officials are also expected to start winding down their asset purchases after March, removing a key element of support from the market. Their bond-buying program has been integral in pinning down borrowing costs. Despite the latest pullback, there’s still around 1.5 trillion euros ($1.7 trillion) of negative-yielding bonds in the region.
“To have bund yields where they are just seems like the wrong level,” said Craig Inches, head of rates and cash at Royal London Asset Management. He sees yield on 10-year German bonds reaching 0.5% by the end of the year, a level last seen in 2018.
“As some of the stimulus from ECB buying recedes, people will be forced to look at the valuation metric and say — why am I holding this? It just doesn’t make any sense,” he said.
The skepticism fits with the broader global backdrop, where a surge in inflation is forcing some of the world’s biggest central banks to reconsider their accommodative stances. From Treasuries to Australian bonds, rates markets have taken a battering as traders adjust their expectations.
UBS AG sees the 10-year yield rising to 0.25% by the end of the year and ING Groep NV is penciling in 0.2%. It fell as much six basis points to minus 0.09% on Friday, after touching a high of 0.02% earlier in the week.
But a move into positive territory would also come with benefits. According to Antoine Bouvet, a rates strategist at ING, certain investors including central banks can only buy positive-yielding assets. “Negative rates is not something they would want to incur even if diversification argues in favor of buying EUR,” he said.
Rising yields might help lure foreign investment, the European Commission’s Koopman said at a webinar on Thursday organized by the Official Monetary and Financial Institutions Forum, a think tank for economic policy.
The trouble is that with investors waiting in the wings, any increase in yields could prove fleeting. Toronto-Dominion Bank is already recommending clients buy German bunds, saying the move is now overdone.
“Positioning has turned short too quickly and could reverse as we see strong seasonal month-end buying,” Pooja Kumra, a senior European rates strategist at the bank, wrote in a note to clients on Wednesday, targeting a move back to minus 0.15%.
Other bond bulls are also holding firm, saying the market has gotten ahead of itself when it comes to pricing in rate increases.
“What is priced in is unrealistically hawkish for the ECB,” said Chris Attfield, a fixed-income strategist at HSBC Holdings Plc, who expects the German 10-year yield to end the year at minus 0.5%, while brushing off the latest selloff as volatility that is typical in the beginning of the year.
For Jefferies International strategist Mohit Kumar, structural factors such as demographics and technology will “suppress inflation over the medium term.” He doesn’t expect the ECB to raise rates through 2023.
Still, a repricing looks inevitable for some. Consumer prices in the region rose more than expected to a record high of 5% in December. And ECB officials including Francois Villeroy have warned the market that earlier rate hikes might be needed if inflation proves to be persistent.
“Positive yields are here to stay,” said ING’s Bouvet. “It’s a brand new world.”
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