Lecture: "Pain is finishing in Spain" 15 June 2016

Pain is finishing in Spain, but is prosperity just around the corner in this country? 15th June 2016 Ramón Bermejo Climent Source: based on Bloomberg, ECB website and proprietary analysis Audience: MBA Program Weatherhead School of Management - Case Western Reserve, University (Cleveland, Ohio) Place: Madrid

LECTURE

Index

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0. Introduction: placing Spain on the map. 1. Analysis of the housing bubble in Spain and loans.

• Evolution of the housing prices per m2 since 1995. • Spain total defaulted mortgages housing purchases. • Spain loan delinquencies proportion of total since 1990 • Spain mortgage statistics total number of newly mortgaged properties. • Building Permits & Building (Housing) Starts. • House Prices:

• New Homes & Existing Homes. • Spain House Transactions.

• Spain total consumer loans. 2. The employment situation in Spain (Labor Market).

• Unemployment rate. • Spain Registered Unemployment Level MoM Net Change (rate) • Spain Registered Unemployment Level Latest Revision (in numbers). • Spain wage income index. • Wages & Labor Costs.

3. The GDP growth (% QoQ, YoY). Double Dip (2009-2012). • Spain Annual GDP Constant Prices (by Eurostat) in numbers. Spain General Government Debt Total. • Spain Budget Balance (% of GDP). Spain debt as percentage of GDP. • Household consumption: the main component of GDP.

4. Industrial Production & Capacity Utilization. Production of Main Spanish Industrial Goods. • Consumer Goods: Durable & Non Durable • Intermediate Goods. • Energy.

5. Surveys/Cyclical Indicators: • European Commission Economic Sentiment Indicator Spain. • EC Consumer Confidence Spain General Economic Situation Next 12 Month

6. Retail Sales & Wholesale sector. • New Car Registrations.

7. Trade Balance. 8. Consumer Prices. 9. Producer Prices. 10. Corporate bankruptcies in Spain: Spain bankruptcy total level 11. CDS (Credit Default Swap) of the Kingdom of Spain & sovereign bonds in July 2012:

• The “help” of Mario Draghi and his “…whatever it takes to preserve the euro…” of 26 July 2012 in London, 2 August 2012 (ECB, Press Conference) and the OMT (Outright Monetary Transactions – 6 September 2012).

• The OMT program had a sizeable impact on financial markets (equity markets & sovereign bonds & 10 years (Spain-Germany) sovereign bonds yield spread): Working Paper of the ECB “The Financial and Macroeconomics effects of the OMT announcements” August 2014.

12. The expanded Assets Purchase Programme of the ECB –(APP) (22 January 2015) and its impact on the financial markets.

13. Appendix about the U.S economy: the situation of the current business cycle paying strict and special attention to the Change in Non Farm Payrolls and the Federal Reserve Labor Market Conditions index in the coming months.

1. Introduction: placing Spain on the map

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Spain is the fourth largest economy in the Euro Zone and the fifth biggest economy in the European Union. The country has a strong and diverse manufacturing industry and is one of the biggest tourist destinations in the world. However, in the third quarter of 2008, following the burst of a huge housing bubble, the country plunged into a deep recession, -a double dip recession-, and has only starting to recover in the middle of 2013 (as we will see in many gauges later). The economic crisis gave rise to very high losses in output and employment, as nearly one quarter of the active population has been unemployed for the last 5 years, reaching the unemployment rate dramatic readings of 26% in 2013, very similar to the Great Depression of the U.S. in the 1930s (25%). On the expenditure side, household consumption is the main component of GDP accounting for 55 percent, followed by gross fixed capital formation (22 percent) and government expenditure (20 percent). Exports of goods and services account for 32 percent of GDP while imports account for 29 percent, adding 3 percent of total GDP

55% 22%

20%

3%

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•Households and NPISHs Final Consumption Expenditure 55%

•General Government Final Consumption Expenditure 20%

•Gross Fixed Capital Formation 22% Exports - Imports (Goods and Services) 3%

Domestic Demand

1. Introduction: the GDP in Spain. Weight of its components - December 2015 (%)

1. Analysis of the housing bubble in Spain and loans. • Evolution of the housing prices per m2 since 1995: +214% between March 1995-March 2008

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House Prices: This concept tracks changes in residential property prices (per meter square)

1. Analysis of the housing bubble in Spain and loans. • Evolution of the housing prices per m2 since 1995: -31% between March 2008 –September 2014

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House Prices: This concept tracks changes in residential property prices (per meter square)

1. Analysis of the housing bubble in Spain and loans. • Spain total defaulted mortgages housing purchases in

millions of Euros: improving since March 2014

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Nonperforming (Bad) Loans: This concept tracks loans that are in default or close to being in default. A loan is nonperforming when payments of interest and principal are past due for a specified period of time (e.g. 90 days or more).

1. Analysis of the housing bubble in Spain and loans. • Spain Loan delinquencies proportion of total (DELINQUENCY RATE)

since 1990: improving since the level of 13% of December 2013. Goods news for the banking sector in Spain!

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Delinquencies: Delinquencies represent a neglect in making required payments on a debt.


since 1990: improving since the level of 13% of December 2013 and showing a strong correlation with the unemployment rate.

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since 1990: improving since the level of 13% of December 2013 and showing a strong correlation with the unemployment rate and with the end of the sovereign debt crisis in 2012 (e.g. Spain CDS 5 Years)

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1. Analysis of the housing bubble in Spain and loans. • Spain total number of newly mortgaged properties: improving

since August 2013

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Mortgage Approvals: This concept tracks the number of mortgage loans that have been approved by lenders.

1. Analysis of the housing bubble in Spain and loans. • Building Permits: improving since August 2013

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Building Permits (Number) This concept tracks the number of permits that have been issued for new construction, additions to pre-existing structures or major renovations.

1. Analysis of the housing bubble in Spain and loans. • Building (Housing) Starts: is stabilizing since 2013

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Building (Housing) Starts: Housing (or building) starts track the number of new housing units (or buildings) that have been started during the reference period.

1. Analysis of the housing bubble in Spain and loans. • New Homes Prices: improving since June 2013

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New Homes Prices: This concept tracks changes in residential property prices.

1. Analysis of the housing bubble in Spain and loans. • Existing Homes Prices: is stabilizing since 2013

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Existing Homes Prices: This concept tracks changes in residential property prices.

1. Analysis of the housing bubble in Spain and loans. • Spain house transaction: is stabilizing and improving since April 2012

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Spain house transactions: This concept tracks changes in sales within the construction industry.

1. Analysis of the housing bubble in Spain and loans. • Spain Total Consumer Loans: is stabilizing since 2013

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Consumer Credit Outstanding (Nonmortgage): Consumer or Household Credit tracks the outstanding amount of credit (or loans) used by consumers to finance purchases of goods or services. It can include everything from credit card lending, to auto loans, to lines of credit but it excludes mortgage loans.

2. The employment situation in Spain. • Eurostat Unemployment rate Spain (20%): in July 2013 we reached in

Spain a dramatic level (26%) very similar to the Great Depression in the U.S. (25%) in the early 1930s.

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Unemployment Rate: The unemployment rate tracks the number of unemployed persons as a percentage of the labor force (the total number of employed plus unemployed).

2. The employment situation in Spain. • Spain Registered Unemployment Level Month Over Month Net Change. May 2016, the best data in May of the series: JOBLESS CLAIMS FALL 119.768 IN MONTH. Spanish Labor Ministry registered unemployment fell 119,8k m/m in May to 3,89 millions.

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Unemployment Claims (outstanding): This concept tracks the total number of people who have filed jobless claims with the appropriate government labor office; typically, in order to receive unemployment benefits. This is also sometimes referred to as registered unemployment.

2. The employment situation in Spain. Spain Registered Unemployment Level (in numbers): is improving from

February 2013. Spanish Labor Ministry registered unemployment fell in May to 3,89 millions

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Unemployment Claims (outstanding): This concept tracks the total number of people who have filed jobless claims with the appropriate government labor office; typically, in order to receive unemployment benefits. This is also sometimes referred to as registered unemployment.

2. The employment situation in Spain. Wages & Labor Costs: Spain Wage Income Index: improving since October

2013

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Wages: This concept generally tracks total remuneration (in cash or in kind) paid to employees in return for work done (or paid leave).

2. The employment situation in Spain. Wages & Labor Costs: Spain Labor Costs Services Avg Monthly Salary Cost per Worker:

increasing since December 2012

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3. The GDP growth in Spain. Spain Real GDP Quarter over Quarter (+0,8%) & Year over Year (+3,4%):

DOUBLE DIP RECESSION (2009-2012)

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Real GDP by Expenditure: Gross domestic product (GDP) measures the final market value of all goods and services produced within a country. It is the most frequently used indicator of economic activity. The GDP by expenditure approach measures total final expenditures (at purchasers' prices), including exports less imports. This concept is adjusted for inflation.

3. The GDP growth in Spain. Spain (+0,77%) versus Euro Area (+0,50%) Real GDP Quarter over Quarter: Spain is performing better than the Euro Area

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3. The GDP growth in Spain. Spain (+3,4%) versus Euro Area (+1,7%) Real GDP Year over Year Spain is performing better than the Euro Area

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3. The GDP growth in Spain. Spain Real Chained GDP Prices Household Final Consumption Expenditure QoQ (55% of GDP): is the main component of GDP accounting for 55 percent of its total use (in the U.S. is the 71% of the GDP) and it is showing a DOUBLE DIP.

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3. The GDP growth in Spain Domestic Demand A ) Final Consumption Expenditure (YoY): Components (NORMALIZED BASE JUNE 2007): 1. Household Final Consumption Expenditure Double Dip (2009-2013) 2. NPISH (Non Profit Institutions) Final Consumption Expenditure 3. Government Final Consumption Expenditure

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3. The GDP growth in Spain Domestic Demand b) Gross Fixed Capital Formation (YoY): Components (NORMALIZED BASE JUNE 2007):

1. GFCF Tangible Fixed Assets • GFCF Construction • GFCF Equipment and Cultivated Assets (managed forests, livestock raised for milk

production, etc)

2. GFCF Intangible Fixed Assets (Intellectual Property Products)

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3. The GDP growth in Spain Exports & Imports (YoY) Components (NORMALIZED BASE JUNE 2007):

1. Exports of Goods & Services 2. Imports of Goods & Services

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3. The GDP growth in Spain Weight of its components December 2015 (%) Source: Eurostat

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Households and NPISHs Final Consumption Expenditure 55%

General Government Final Consumption Expenditure 20%

Gross Fixed Capital Formation 22%

Exports - Imports of Goods and Services 3%

55%

22%

20% 3%

3. The GDP growth in Spain. Spain Annual GDP Constant Prices (by Eurostat) in NUMBERS (Annual value): 1.071,9 millions of EUROS (31 December 2015)

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3. The GDP growth in Spain. Spain General Government Debt Total: 1.072 millions of EUROS (31 December 2015)

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Government Debt: This concept includes all financial liabilities of a government (either central or central + local governments). These liabilities are typically in the form of government bills and bonds.

3. The GDP growth in Spain. Spain Budget Balance (% of GDP): there is a budget deficit of -5,10% (December 2015). It is improving since 2012 (the end of the sovereign debt crisis)

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Spain Government Budget Spain recorded a Government Budget deficit equal to -5,10 percent of the country's Gross Domestic Product in 2015. Government Budget in Spain averaged -3.81 percent of GDP from 1995 until 2015, reaching an all time high of 2.20 percent of GDP in 2006 and a record low of -11 percent of GDP in 2009. Government Budget in Spain is reported by the Eurostat and is an itemized accounting of the payments received by government (taxes and other fees) and the payments made by government (purchases and transfer payments). A budget deficit occurs when an government spends more money than it takes in. The opposite of a budget deficit is a budget surplus.

3. The GDP growth in Spain. Eurostat Spain Government Debt as a Percentage of GDP: 99,20% (December 2015)

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Industrial Production (Volume): Industrial production measures the output of industrial establishments in the following industries: mining and quarrying, manufacturing and public utilities (electricity, gas and water supply). Production is based on the volume of the output.

4. Industrial Production & Capacity Utilization. Spain Industrial Production Index (YoY): SPAIN APRIL SEASONALLY ADJUSTED

INDUSTRIAL OUTPUT WAS 2,7%

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Industrial Production (Volume): Industrial production measures the output of industrial establishments in the following industries: mining and quarrying, manufacturing and public utilities (electricity, gas and water supply). Production is based on the volume of the output.

4. Industrial Production & Capacity Utilization. SPAIN INDUSTRIAL PRODUCTION MoM NORMALIZED BASE 100 since March 2008 using data since May 2007 and a simple moving average of 12 months

+6% -28%

Minimum October 2013

4. Industrial Production & Capacity Utilization. Capacity Utilization Spain (Quarterly - European Commission): improving since March 2013 (Level: 77,80%)

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Capacity Utilization: Capacity utilization tracks the extent to which the installed productive capacity of a country is being used in the production of goods and services. For some countries this concept is reported as the percent of capacity being used for production (as opposed to sitting idle). For other countries, this concept is measured through business surveys (tracking business leaders' opinions on their use of productive capacity).

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NOTE:

Seasonally and working day adjusted (SWDA) data have been adjusted for both seasonal patterns and working day effects. 1. Seasonal patterns can include things such as increased retail spending around Christmas or decreased construction

activity during winter months in colder climates. 2. Working day effects (or calendar variations) include differing number of working or trading days in a given month

or quarter. Since some months (or quarters) naturally have more working days than others (due to the differing number of holidays or Sundays, Mondays, etc.), this adjustment seeks to smooth out the working day differences between months.

Analysts generally prefer to use seasonally adjusted data, as it is easier to observe the underlying trend in the data series. Transformation YoY%: Data with the transformation YoY% represent growth rates between the reference period and that same period one year ago. Year-on-year growth rates can be calculated by taking the underlying data of the reference week/month/quarter (e.g. Jan 2013) divided by the same period one year ago (e.g. Jan 2012) as per the following formula: (M[t]/M[t-12]-1)*100 or (Q[t]/Q[t-4]-1)*100 [where M[t] (or Q[t]) = underlying level in reference month (or quarter), t]

4. Production of Main Spanish Industrial Goods Spain Industrial Production Consumer Goods SWDA Y

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4. Production of Main Spanish Industrial Goods Spain Industrial Production Consumer Goods SWDA YoY: +2,8%

Spain Industrial Production Consumer Goods SWDA MoM: 96,34

+(96,34-93,69)/93,69 = 2,8%

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4. Production of Main Spanish Industrial Goods Spain Industrial Production Durable Consumer Goods SWDA YoY: -5,5%

Spain Industrial Production Durable Consumer Goods SWDA MoM: 66,15

=+(66,15-69,99)/69,99 =-5,5%

Durable Goods : goods usable for a relatively long time, as machinery, automobiles, or household appliances

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4. Production of Main Spanish Industrial Goods Spain Industrial Production Non Durable Consumer Goods SWDA YoY: +3,1%

Spain Industrial Production Non Durable Consumer Goods SWDA MoM: 99,68

=+(99,68-96,65)/96,65= 3,1%

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4. Production of Main Spanish Industrial Goods Spain Industrial Production Capital Goods WDA YoY: +11,5%

NOTE: WDA: Working day adjusted (WDA) data have been adjusted for nonseasonal effects related to the number of working or trading days in a given month or quarter (calendar variations). Since some months naturally have more working, or trading, days than others (due to the differing number of holidays or Sundays, Mondays, Tuesdays, etc.) this adjustment seeks to smooth out the working day differences between months. Working day adjustment is sometimes also referred to as trading day adjustment.

Capital Goods : Assets used to produce other goods. For example, a machine used to produce bolts would be a capital good.

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4. Production of Main Spanish Industrial Goods Spain Industrial Production Capital Goods WDA YoY: +11,5%

Spain Industrial Production Capital Goods WDA MoM: 105,62

=+(105,62-94,76)/94,76 = 11,5%

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4. Industrial Production & Capacity Utilization. Spain Industrial Production Energy SWDA YoY: -1,6%

Spain Industrial Production Energy SWDA MoM: 92,83

=+(92,83-94,34)/94,34 = -1,6%

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4. Industrial Production & Capacity Utilization. Spain Industrial Production Intermediate Goods SWDA YoY: 0,5%

Spain Industrial Production Intermediate Goods SWDA MoM: 93,32

There is an error in Bloomberg: 0,1% is wrong. The correct reading is 0,5%.

=+(93,32-92,86)/92,86= = 0,5%

Intermediate Good Definition An intermediate good is a good or service that is used in the eventual production of a final good, or finished product. These goods are sold by industries to one another for the purpose of resale or producing other goods. An example of an intermediate good would be sugar, which is directly consumed but is also used to manufacture food products.

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5. Surveys/Cyclical Indicators: • European Commission Economic Sentiment Indicator Spain: improving since August

2012 (after the Mario Draghi´s “magic” words of 26 July 2012 in London)

The Economic Sentiment Indicator is calculated from the European Commission's Business and Consumer Surveys: It is constructed from the following indicators: the industrial confidence indicator (40%), the service confidence indicator (30%), the consumer confidence indicator (20%), the construction confidence indicator (5%), and the retail trade confidence indicator (5%).

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5. Surveys/Cyclical Indicators: • EC Consumer Confidence Spain General Economic Situation Next 12 Month: improving

since August 2012 (after the Mario Draghi´s “magic” words of 26 July 2012 in London)

Target Audience: households Sample Size: 2,000 households Date of Survey: first 2 or 3 weeks of the month

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6. Retail Sales & Wholesale sector. • New Car Registrations (113.671 cars in May 2016): in a road to recovery since

the through of September 2012 (35.148 cars)

Motor Vehicle Sales (Registrations): This concept tracks the number of motor vehicles newly registered with a government authority.

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7. Trade Balance: -759,9 Millions Euros (deficit)

International Trade Balance (Nominal/Value): The international trade balance measures the difference between the movement of merchandise trade leaving a country (exports) and entering a country (imports). This measure tracks the value of the merchandise trade balance.

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7. Trade Balance: difference between Exports and Imports: 22.443,1 – 23.238,9 = -759,9 Millions Euros (deficit)

Exports Imports

8. Consumer Prices in Spain. Spain (white) versus Euro Area (red) CPI Year over Year: IN DEFLATION

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Harmonised Index of Consumer Prices: The harmonised index of consumer prices (HICP), used primarily within the European Union, is a measure of prices paid by consumers for a market basket of goods and services. It is calculated using the same methodology across countries to allow for comparable measures of inflation. The yearly (or monthly) growth rates represent the inflation rate.

9. Producer Prices in Spain (YoY): still falling…

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Producer Prices (Output Prices): Producer prices (output) are a measure of the change in the price of goods as they leave their place of production (i.e. prices received by domestic producers for their outputs either on the domestic or foreign market).

10. Corporate bankruptcies in Spain. Spain Bankruptcy Total Level: improving since March 2013

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Spain Bankruptcy Total Level: Since September 2004, this statistic replaces the Suspensions of Payments and Bankruptcy Declarations Statistic, which was no longer published after the entry into force of the Insolvency Act on 1st September 2004. Levels indicate number of bankruptcies.

11. CDS (Credit Default Swap) of the Kingdom of Spain & sovereign bonds in July 2012

The huge sovereign debt crisis of Europe in the summer of 2012:

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Since the onset of the financial crisis in August 2007, the Eurosystem (ECB + NCBs) has engaged in several unconventional monetary policy measures to ensure the correct pass-through of the monetary policy stance to the economy. After an initial phase in which the non-standard measures were mostly intended to address impairments in the interbank markets, the financial fragmentation stemming from the sovereign debt crisis and the resulting concerns of international investors about excessive national debt in several euro area countries led to an extension in the scope of intervention to the secondary sovereign bond markets. Among other forms of interventions intended to safeguard orderly monetary policy transmission, during the period July to September 2012, the Governing Council of the ECB announced that the bank might engage in outright monetary transactions (OMTs) in the secondary markets for government bonds.


• Spain CDS USD SR 5Y

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•Mario Draghi and his “the ECB is ready to do whatever it takes to preserve the euro and believe me…it will be enough” - 26 July 2012. •ECB (European Central Bank) and the OMTs (Outright Monetary Transactions) announcements - 6 September 2012


• Spain CDS USD SR 5Y

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• Spanish Sovereign Bonds 10 years maturity

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• Spanish Sovereign Bonds 10 years maturity

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• Spain CDS USD SR 5Y versus IBEX 35 index (inverse or negative correlation)

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• It was, by far, the worst moment and the turning point of the financial crisis (sovereign debt crisis)…

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•Mario Draghi, President of the ECB (European Central Bank) and his “magic” words: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” 26 July 2012, at the Global Investment Conference in London. https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html


• …the situation improved again the 2nd August 2012 in the Press Conference of the ECB…

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•Mario Draghi, President of the ECB (European Central Bank) and his words in the introductory statement to the press conference: “The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. (…) Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission.” 2 August 2012

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• …and, definitely, the 6th September 2012 with the OMT (Outright Monetary Transactions) announcements, the “sun” started to shine in Spain, again.

Coverage: “Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years. No ex ante quantitative limits are set on the size of Outright Monetary Transactions.”

http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html

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• …and there is a very interesting working paper titled: “The Financial and Macroeconomics effects of the OMT announcements”

• Among other forms of intervention aimed at avoiding impairments in monetary policy transmission, in the period July to September 2012, the Governing Council of the ECB announced that the bank might engage in outright monetary transactions (OMTs) in the secondary markets for government bonds. In particular, on July 26, 2012, during a conference in London, President Draghi said that the ECB was ready to do “whatever it takes” to preserve the euro within the limits of its mandate. • On August 2, 2012, during the press conference after the Governing Council meeting, President Draghi announced, “ECB may undertake outright open market operations.” Finally, on September 6, 2012, the ECB’s Governing Council announced a number of technical features of the OMT program.

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More precisely, the ECB stated that no ex ante quantitative limits would be considered for outright transactions in secondary sovereign bond markets, that purchases would concentrate on bonds with remaining maturities of up to three years. Although none of the euro area countries has asked to activate the OMT program, had a sizeable impact on financial markets This study aims to quantify the financial and macroeconomic impact of OMT announcements in four euro area countries: Germany, France, Italy, and Spain and suggests that the reduction in bond yields due to OMT announcements is associated with a significant increase in real activity and credit in Italy and Spain.

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“Our evaluation suggests that OMT announcements

have statistically significant and economically relevant effects on credit, as well as on economic growth in general, in Italy and Spain, with relatively limited spillovers in France and Germany.” Changes in financial prices originated by the OMTs announcements altered the behavior of private agents, affecting positively the rest of the economy.

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Called QE (Quantitative Easing) It includes 4 types of assets:

A. Third Covered Bonds Purchase Programme (CBPP3) 4 September 2014

B. Asset-Backed Securities Purchase Programme (ABSPP) 4 September 2014

C. Public Sector Purchase Programme (PSPP) 22 January 2015 – Started: 9 March 2015

D. Corporate Sector Purchase Programme (CSPP) 10 March 2016 – Started: 8 June 2016

12. ECB announces expanded asset purchase programme (22 January 2015). Impact on the financial markets.

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•ECB expands purchases to include bonds issued by euro area central governments, agencies (e.g. ICO) and European institutions (e.g. EIB) •Combined monthly asset purchases to amount to €60 billion •Programme designed to fulfill price stability mandate

This programme add the purchase of sovereign bonds to its existing private sector asset purchase programmes in order to address the risks of a too prolonged period of low inflation. The Governing Council took this decision in a situation in which most indicators of actual and expected inflation in the euro area had drifted towards their historical lows. As potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments, this situation required a forceful monetary policy response. Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%.


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Covered Bonds - Cedulas Hipotecarias Españolas (10 years ) –daily series–

Third Covered Bonds Purchase Programme (CBPP3) 4 September 2014

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Covered Bonds - Cedulas Hipotecarias Bankia (10 años) –daily series–


Third Covered Bonds Purchase Programme (CBPP3) 4 September 2014

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German Sovereign Bond “on the run” DBR 0 ½ 02/15/25 –daily series–

Public Sector Purchase Programme (PSPP) 22 January 2015 – Started: 9 March 2015 on secondary markets

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–


Public Sector Purchase Programme (PSPP) 22 January 2015 – Started: 9 March 2015 on secondary markets

German Sovereign Bond “on the run” DBR 0 ½ 02/15/25 –daily series–

German Sovereign Bond “on the run” DBR 0 ½ 02/15/25

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–


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Public Sector Purchase Programme (PSPP) 22 January 2015 – Started: 9 March 2015

Germany Generic Government 10 years –daily series– (Yield)


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Additional questions about the QE: Can the asset purchase programme help the ECB to foster growth and job creation in Europe? The ECB has a clear mandate: maintaining price stability. This programme will help to bring inflation back to levels in line with the ECB's objective. But it will also help businesses across Europe to enjoy better access to credit, boost investment, create jobs and thus support overall economic growth, which is a precondition for inflation to return to and stabilise at levels close to 2%. Subject to price stability, these are also important objectives to which the ECB contributes in line with the Treaty. Is the asset purchase programme monetary financing? The ECB strictly adheres to the prohibition on monetary financing by not buying in the primary market. The ECB will only buy bonds after a market price has formed. This ensures that the ECB does not distort the market pricing of risk.


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Additional questions about the QE: Is the ECB the only central bank conducting asset purchases? Many central banks have used outright purchases as part of their monetary policy, often referred to as quantitative easing, or QE. It has been employed by the Federal Reserve Board, the Bank of England and the Bank of Japan. Open market operations are a core instrument of central banks even in normal times. Outright purchases become useful when policy interest rates cannot be reduced any further. They can help central banks to fulfil their mandate, which in the case of the ECB is maintaining price stability, and thereby support growth and the creation of jobs. Is the asset purchase programme aimed at helping specific countries? The programme is designed to push inflation and inflation expectations back to levels closer to the ECB's objective in the euro area as a whole. It does not reduce the debt of any particular country.


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13. Appendix about the U.S economy: the situation of the current business cycle

paying strict and special attention to the Change in NonFarm Payrolls and the Federal Reserve Labor Market Conditions index in the coming months.

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Where is the peak of the U.S. business cycle? 8th May 2016 Ramón Bermejo Source: based on Bloomberg

S&P 500 index versus Fed Labor Market Conditions Index versus Recession Indicator

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According to the criteria of the NBER (National Bureau of Economic Research) from the last trough of the Great Recession (Peak: December 2007 -published by the NBER in December 1, 2008-; Trough: Jun 2009 -published by the NBER in September 20, 2009-), the economic expansion of the U.S. current business cycle has just entered its 83rd month, so tomorrow 9th of May at 16:00 (Spain time) we are going to pay close attention to the Federal Reserve Labor Market Conditions Index release, because its last three readings have suggested that the labor market has deteriorated in each month of the last three months. The Federal Reserve Labor Market Conditions Index is calculated as a weighted average based on 19 monthly labor market indicators to gauge improvements in the labor market. The 19 labor market variables used by the Fed are: the unemployment rate, the labor participation rate, part-time for economic reasons, private payroll employment, government payroll employment, temporary help employment, average weekly hours, average weekly hours of persons at work, the average hourly earnings, the composite help-wanted index, the hiring rate, the transition rate from unemployment to employment, the insured unemployment rate, job losers unemployed less than 5 weeks, the quit rate, job leavers unemployed less than 5 weeks, the Conference Board Survey on job availability, the NFIB Survey on hiring plans and difficulty to fill a job.

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As you can notice in the shadows areas in blue color (2000, 2002, 2007, 2016) of the charts (showing the correlation between the S&P 500 index vs Fed Labor Market Conditions Index vs U.S. Recession Indicator), the LMCI started a tendency in negative territory. The question now is...Is this the start of something similar for the U.S. equity markets that we saw in 2000 (April-June), 2002 (June-August) and 2007 (May-July) in the LMCI? We are going to stay vigilant about the possibility that the reading of tomorrow could be in negative territory again and deeper than the three precedent months (January: -1,8 points; February: -2,5 points; March: -2,1 points). It could be an excellent leading indicator to detect a turning point in the current business cycle again.

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3rd June 2016

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6th June 2016

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6th June 2016

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Date post:	12-Jan-2017
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Lecture: "Pain is finishing in Spain" 15 June 2016

Economy & Finance