A Tale Of Two Central Banks (Fed Vs ECB And Their Bank Stocks)

This is a tale of two Central Banks: The US Fed and the European Central Banks. And their respective commercial banks.

First, The Federal Reserve. US commercial banks recovered from the global financial crisis, although not completely.

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But for the ECB, such is not the case for European banks.

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Indeed, this a tale of two Central Banks.

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Blitzkrieg Bop! US Mortgage Rate Fall As Economic Barbell Stresses US Rates (Treasury Volatility Curve Sends Disturbing Message)

US home buyers are benefitting from European economic misery (particularly Germany and fiscal-stressed Italy). I call this the Blitzkrieg Bop.

On the other side of the interest rate barbell is China (and Japan). So while the USA is growing, Germany and Japan are not doing so well, causing their Central Banks to push rates to zero .,.. or lower. Even China’s Central Bank is buying everything in sight in fear of a recession.

Hence, US mortgage lenders and potential homebuyers benefit is terms of dropping interest rates.

You can see the downward plunge in the Treasury Volatility Curve (MOVE – TYVIX) as Central Banks become active in 2008 and 2009. The 30-year mortgage rate has been declining thanks to hyper-intrusion of global central banks, killing off bond volatility.

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Allegedly, The Federal Reserve is ceasing its raising of their target rate and will stop shrinking their balance sheet in September.

Mortgage purchase applications (NSA) are in their third phase and doing quite nicely, helped along recently by the barbell slowdowns overseas.

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Rollercoaster! Global Economic Growth (G10, US, Emerging) Sliding Down Together

The global economy is in a rollercoaster pattern.

And unfortunately the G10, US and Emerging nations are on the downward side.

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This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”

 

 

Alarm! Europe’s And US Bond Volatility Grinding To A Halt (Precursor To Recession)

European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.

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A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.

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Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.

Alarm!

 

The Mummy Returns! ECB’s Draghi Raises Their TLTRO Program From The Dead To Combat Weak Euro Area Growth

The ECB’s Mario Draghi has decided to raise the dead (as in Modern Monetary Theory) by reviving the ECB’s Targeted Longer-Term Refinancing Operations.

Mario Draghi revealed the biggest cut in the European Central Bank’s economic outlook since the advent of its quantitative-easing program as policy makers delivered a new round of stimulus to shore up growth. The ECB president said the euro-zone economy will expand just 1.1 percent this year, 0.6 percentage point less than forecast in December. 

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The central bank will revive its Targeted Longer-Term Refinancing Operations to encourage banks to provide credit to businesses and consumers, and will hold interest rates at current record-low levels at least through the end of the year, several months later than previously indicated.

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The Euro declined on Draghi’s announcement.

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And most Euro area 10 year sovereign yields are down 5 basis points or more.

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Draghi must not read from the Modern Monetary Theory (MMT) book!

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