ECB PEPP reinvestments need to stop
1. The PEPP program - unlike QE under Draghi - allows ECB to skew bond buying in favor of certain countries. Maybe that was ok at the height of COVID, but it is NOT justified now. PEPP reinvestments that favor certain countries need to stop... 2. The country skew in ECB PEPP purchases has gone under the radar, but it shouldn't because it takes ECB bond buying into quasi-fiscal territory. This kind of fiscal skew would have been unthinkable when the ECB was established and is anathema to voters in northern Europe...

The US banking shock
1. The SVB shock is now almost 3 months old. Since then, deposits have stabilized (lhs, red). The more noteworthy development is on lending, which has ground to a halt (rhs, red) vs torrid loan growth in 2022 (rhs, blue). Where's this "sudden stop" happening? 2. The "sudden stop" in loan growth is most pronounced for C&I loans, where cumulative loan growth is 0.3% year-to-date versus 7.8% in 2022 (lhs). That's a HUGE slowdown in lending. Same for consumer loans, where cumulative growth is -0.2% year-to-date versus 4.5% in 2022 (rhs).

Germany in Crisis: Eurovision 2023
1. To many of us who - like me - love German rock and the fine "Schlager" genre, yesterday's last place finish at Eurovision was a gut punch. Germany faces many challenges, but - the common denominator for all of them - is Germany's music crisis 2. Germany last got first place in 2010 with Lena's mega hit "Satellite," a song we all love. Ever since, it's been the musical wilderness, with last place finishes in 2015, 2016, 2022 & now 2023. Germany got next-to-last place in 2021 and 2019 thanks only to the UK placing last.

Euro zone inflation puzzle
1. Back in 2019, we started the Campaign against Nonsense Output Gaps (CANOO), arguing that Euro zone slack is greater than consensus thinks, yet Euro zone core inflation (orange) rose along with everyone else. How can this be? @adam_tooze @heimbergecon 2. There's little doubt that Euro zone slack is greater than the US. Trend growth pre-GFC was on par with the US, only to fall behind in the decade following the 2008 crisis. The Euro zone HAS to have come into COVID and Russia's invasion of Ukraine with more slack than the US...

Italy's export surge to China
1. Last week we flagged a big rise in Italian exports to China. Here's the story. Without western vaccines, China's consumers are buying a generic liver drug made in Italy that's rumored to prevent COVID. Big thanks to @bancaditalia and @p_ceretti... 2. You can break out Italy's total exports to China into pharmaceuticals (red) and other (blue). The sharp rise in Italy's exports in recent months is entirely accounted for by pharmaceuticals. Other exports to China are actually down a bit. With @econchart and @JonathanPingle

Needed steps on Russia sanctions
1. Financial sanctions are very effective for current account deficit countries. Deficit countries borrow on global markets, which can make sanctions very impactful. Turkey in 2018 is an example. But Russia has a large current account surplus... 2. Russia's current account surplus - from energy exports - means it is a net lender to the world, not a borrower. We did sanction some banks, including the central bank (red), but Russia just built up foreign assets via non-sanctioned banks (blue). Putin still got tons of cash.

Europe's flawed debate on fiscal rules
1. Europe's debate on fiscal rules is flawed, as de facto spread management - and resulting low yields - make it seem like highly indebted periphery countries have fiscal space, when they do not. A major overhaul of this debate is needed. 2. Periphery spreads are low. Much of this is due to de facto spread management. We have a natural experiment to show this. In March 2020, President Lagarde said: "ECB isn't here to close spreads." Spreads immediately shot up. There's been de facto spread management ever since.

Evaluation of our sanctions policy
1. Only 2 questions matter. First, have our sanctions meaningfully curtailed Russia's ability to wage war? Second, are our sanctions a deterrent to countries that may wage war in the future? Unfortunately, the answer to both questions is: "No!" 2. Root problem is an infatuation with financial sanctions. These can be effective when used on current account deficit countries - Turkey in 2018 is an example - but they don't work on current account surplus countries. This is a key point that cannot be emphasized enough.

Requiem for IMF/WB spring meetings
1. After SVB, everyone's more bearish, but NO ONE forecasts a US hard landing, hard to square with reality of credit cycles. Assume credit is flat into end-2023 (black). Credit impulse (blue) - which drives GDP growth - goes deeply negative... 2. So there's a kind of collective denial how credit cycles work. Assuming credit in % GDP is stable into end-2023 is arguably an optimistic assumption. Yet even in this positive scenario, the credit impulse almost guarantees a US hard landing. Odds of deep recession have risen.

You don't see it looking at $/TRY, but Turkish Lira is under big depreciation pressure. Only thing that stops this is to slow credit growth, which is running out-of-control. During the 2018 devaluation, the only thing that stabilized Lira was a credit crunch. It's the same now... Much smarter people than me - including @ali_hakan_kara and @UgrasUlkuIIF - say I should deflate Turkey's nominal credit numbers to adjust for inflation. Not sure. Lira is quasi-pegged, so credit growth spills 1:1 into import demand. If you deflate, you miss that channel...

The fear of inflation is back. Markets are buzzing about a 50 bps Fed hike in March. That's VERY unlikely and only 30 bps are priced. But it is possible markets force the Fed's hand in a replay of what happened last June when the Fed hiked 75 bps (after hiking 50 bps in May). The hurdle to go back up to 50 bps hikes is high, because of a language change in the Feb. 1 statement that "locks" in 25 bps hikes: the statement switched to talking about the "extent" of future hike, replacing the word "pace." So 25 bps hikes for maybe longer, but not 50 bps...

Is the European energy shock over?
1. The Euro (black) is back to pre-war levels and common measures for the Euro zone terms-of-trade - the ratio of export to import prices - have also risen lots (blue). Many are using this to claim the energy shock is over, but that's WRONG... 2. To start with, while gas prices in Europe have fallen from insane levels in Aug. '22, they're hugely above pre-COVID levels. Spot (black) and one-year ahead TTF gas prices (blue) are 260% above 2018-2019 averages. The hit to European - and German - competitiveness is HUGE!

This week's BoJ meeting is wrongly portrayed as a binary choice: (i) keep yield curve control; or (ii) end yield curve control. This is the wrong way of looking at this. What is Governor Kuroda's ultimate objective? It is to exit YCC without the Yen strengthening massively... The Yen has always been the key parameter for Kuroda. After all, it was the risk of $/JPY going below the critical 100 threshold that led to YCC in the first place back in September 2016. $/JPY is falling again sharply now, so it'd be very foolish to just ditch YCC. What to do?

Why no German recession?
1. We wrongly forecast recession in 2022. Kudos to @Isabel_Schnabel who's consistently been more positive and to @ben_moll who's done a great public service tracking the extent to which German industry has shifted away from Russian gas. What is going on? 2. German IP has been incredibly stable through Nov. 2022, falling only -0.5% from Nov. 2021. First off, a warning. German IP decoupled from GDP growth in 2019 when the auto sector went into recession but Germany did not. Some of the resilience now is a bounce-back from that...

The BoJ and yield curve control (YCC)
1. The BoJ introduced YCC in September 2016. At the time, markets worried BoJ would run out of JGBs to buy. Those JGB scarcity worries faded after YCC began in September 2016. Markets "trusted" the 10-year yield cap. Kuroda was off the hook. 2. That changed 2022. Bond yields rose everywhere. There was pressure on JGB yields to rise too. BoJ had to buy tons of JGBs to keep yields from rising. That added liquidity, causing Yen to weaken, with MoF stepping in to shore up the Yen. Huge and very public policy dysfunction.

#MMT versus Reality
1. The main #MMT talking point these days is that high inflation doesn't discredit #MMT, because #MMT never said inflation wouldn't go up. That shows how detached the #MMT crew is from reality, as this year's death of #MMT has little to do with inflation... 2. One example is Japan, which still has no inflation to speak of. The Yen went into a devaluation spiral mid-2022 anyway, because high debt forced the BoJ to keep interest rates low, sending the Yen weaker as global yields rose. High debt is a problem even with low inflation...

The ECB in 2022
1. The problem with Draghi's "whatever it takes" phrase in 2012 is that it was UNCONDITIONAL. That's come back to haunt the ECB. After all, why put up with OMT and its tedious conditionality if - at the end of the day - the ECB will do "whatever it takes" anyway? 2. All this came to a head in 2022. Rate hikes meant countries with large debt overhangs could become unsustainable. Due to Draghi's unconditional pledge, OMT and its reform focus were "unacceptable" on the Euro periphery, so a new facility was needed to enable rate hikes...

Lessons from Russia Sanctions
1. Financial sanctions do little to hurt a current account surplus country. We sanctioned some banks, so accumulation of hard currency from the surplus shifted from sanctioned (red) to non-sanctioned (blue) banks. All that happened is a re-jiggering. 2. The way to prevent this re-jiggering is to sanction ALL banks, but that's equal to a full trade embargo, since Putin won't export oil if he can't get paid. So confronting a c/a surplus country inevitably comes down to hurting it with a trade embargo, not financial sanctions...

Ever since Feb. 24, we've been reluctant to hit Russia where it hurts. That's why we carved out energy and is why we now set the G7 price cap at $60. This is the path of least resistance in the short term, but we are giving Putin the means to fight a "forever war" in Ukraine... A cap of $30, which Poland pushed for, would serve 2 purposes: (i) it would cause immediate devaluation of the Ruble, as massive oil revenues would have halved; (ii) it would signal the G7 & EU are willing to hit back hard using economic means. A cap of $60 sadly does neither...

Falling oil prices are of great strategic importance for the G7 price cap. Weak global demand means OPEC+ production cuts failed to buoy prices. So this is the ideal time for the G7 to set an aggressively LOW price cap to exact maximum pain from Putin. A cap of $30 does this... Putin may retaliate with production cuts. Let's say he cuts production by 2 mn bpd like in May 2020. Prices will spike, but they'll fall back again the very next day as markets trade even more acute global recession. It'll be super hard for Putin to push prices up sustainably...

Debate on the ECB transmission protection instrument (TPI) matters lots for northern creditor countries in the Euro zone. Key issue is whether Italy suffers temporary bond market dislocations or needs permanent fiscal support. If it's the latter, the right tool isn't TPI but OMT. Italy's net new debt issuance has been financed almost entirely by the ECB for 6 out of the 7 years between 2015 and 2021. So it's fair to say that Italy's dependence on the ECB is closer to "permanent" and not about managing temporary dislocations in Italy's bond market...