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European banks are in no mood to take on
additional risks becoming more and more
risk off where they are being aggressive
is in their defensive posture refusing
to lend into the real economy despite
the fact that interest rates are moving
lower both Market as well as Central
Bank policy if there is an increasing
demand for bank loans the European
banking system is refusing to meet it
they appear to be preparing for much
harder times ahead and I don't mean
consumer prices now those have been
making a reappearance in Europe more
recently after price change rates had
tumbled in the summer right into
undershooting territory they've
rebounded because that's how
disinflation goes it's never a straight
line won't stop the media from hammering
the inflation theme though Banks just
aren't buying it neither are the Swiss
by the way they joined France and Italy
on the downside of consumer prices maybe
price changes moved higher in Germany
and Spain more recently but the one that
pay close attention to is instead
Switzerland which while inside of Europe
exists outside the Euro Zone yet is
heavily influenced by changes in Europe
anyway and the Swiss just inched closer
to outright deflation in their latest
update which is more of a reflection on
the situation across Europe than
Europe's own current CPI estimates it
was the Swiss National Bank which kicked
off this ongoing rate cutting cycle and
then excelerated it with its shock 50
last month and when you put all these
indications and signals together they
add up to the euro heading toward parody
with the dollar and even below it why
did dxy rise so sharply to start this
year because the Euro fell hard and all
signs point to it continuing to do so
not because of J Powell versus Christine
lagard the one still trying to figure
out what a CPI even is whereas the
latter at least knows it's the labor
market which is the biggest threat the
euro is dropping on fundamentals the
same as what has European banks on the
defense
the amount of government bonds that
they're buying over there is truly
astounding verging on 2008 2009 or 2020
territory they don't seem to be paying
attention to consumer price rates in
Europe they're more aligned with what
the Swiss National Bank is doing and
Consumer Price behavior in Switzerland
as a forward-looking indicator for
economic and financial risks moving
forward across Europe one thing for sure
as they're buying government bonds
that's part for sure they're also not
lending what they're doing is
increasingly defensive now bank loans
have been rising and had been rising all
throughout 2024 up until and including
November which is the latest data from
the European Central Bank but total
loans have only risen about 1%
year-over-year through November and
we're up just 1% in the last 6 months
which means all of the bank lending came
in the last 6 months going back to
January so February through November
Bank Lending total loans only increased
by € 223 billion EUR which sounds
relatively impressive but it's really
again it's only about a 1% increase
basically a rounding error and most of
that or at least much of that was in
loans made to non mfis or non-monetary
financial institutions or investment
funds Financial firms that are involved
in other things than the real economy
lending to the real economy in Europe
only increased by
€4.3 billion EUR in that same 10-month
period February through November of
2024 and again 124.32607
lending is even worse than just a
straight line sideways it's about 400
billion off where it would be had there
not been this recession developing and
this retrenchment in the banking system
and 400 billion that's a lot when you've
got a total of about 13 trillion in
total loans to the real economy that's
about 3% below where lending should be
which is an enormous Gap to be made up
in any real economic
system so you have to wonder at the very
first where is this rate cut effect
remember that's how it's supposed to go
they all tell us in economics as well as
on TV central Bankers themselves we
lower rates which is supposed to among
other things raise demand for borrowing
borrowers are supposed to be out the
door with lower interest rates lower
borrowing costs they should be lining up
at the Banks Banks should be extending
credit to all of these people but
instead if there is an increase in
demand for loans and there's not much
evidence that that's the case even if
there is demand for loans Banks aren't
willing to meet it they're not lending
to the real economy they are lending to
some Financial firms but what are they
doing instead as I said in the
buying boatloads of government bonds
defensive stuff in fact the numbers are
getting to be really astounding
especially in the latest update through
November banks in that same period
between the end of January so February
through November 2024 they added an
astonishing 232.103
in Government Bond Holdings some of that
is an increase so very moderate increase
in market value but overall Holdings are
up a whopping
145% during that 10-month period
including an enormous 31.6 billion EUR
in November alone that compares to
January 2020 through September 2020 when
European Banks added around 350 billion
euros in Government Bond Holdings or a
23% increase or go back to the recession
session in 2011 2012 between November
2011 and November 2012 so the 13 months
there you saw 2904 billion Euro increase
in Government Bond Holdings by Banks or
about 21% and that was in the midst of a
European bank- centered crisis October
2008 through November 2009 European
Banks added
332.5kg is moving in the same direction
it's got a couple months to go to be the
same same time roughly the same time
period so European banks are becoming
increasingly defensive buying safety and
liquidity not lending it to the real
economy playing it safe because consumer
prices are about to break out that's
certainly not a reason to be buying and
owning and holding government bonds
instead safety and liquidity telling you
right there where the the demand for
those tells you everything about those
characteristics in the financial system
as well as real economy and with those
kinds of fundamentals as perceived by
the European banking system no wonder
the Euro continues to get weaker and
weaker and weaker it opened up on
January 2nd falling down below 103 it's
been back to around 104 more recently
but it had been 112 all the way back in
August and September and now entering
2025 most Traders expected to reach
parody very soon and then continue to go
below parody by par I mean parody with
the dollar one for one exchange value
according to
Bloomberg the common currency has
tumbled over 7% against the greenb since
late September and last week touched a
dollar
226 its lowest level in over two years
options Market imply around a 40% chance
the currency pair will hit parody this
quarter and trading of contracts that
Target that level surged in the last
week since the Euro came into existence
in 99 it is traded at equal value to the
dollar only a handful of times with the
threshold often indicative of relatively
dire economic circumstances compared to
the US and if Europe is in relatively
dire economic circumstances the Europe
us isn't far behind it globally
synchronized in fact as the article
continues the last time was 2022 after
Russia's fullscale invasion of Ukraine
sparked an energy crisis in Europe and
fears of a recession that were not just
fears the Euro fell to parody because
Europe did fall into recession the
entire global economy did experience the
start of the downside of the supply
shock that's what the Euro was signaling
as uh as did the rest of the US Dollar
exchange value crosses so the
fundamentals here are similar where
Europe Europe's and the EUR euro
exchange value are declining because of
the same types of behavior and that's
backed up by by what the banking system
has been doing inside of Europe for over
a year now they're becoming increasingly
defensive the same time the euro is
falling against the dollar both of those
things two sides of the same coin but
even though the risk continue to rise
and it's more than just risk we see that
reality in a couple different places
I'll get to in just a moment including
Switzerland even though the risk
continue to rise lo and behold long-term
rates in Europe are rising anyway just
like they are in the treasury market
treasury market Bond markets fixed
income interest rates they don't go in a
straight line either over in Germany
where the fundamentals are really bad
the euro is falling the banking system
increasingly defensive the economy
looking to get even worse despite all of
that German bun yields the two-year is
up the two years at was at 1.86% on
December 2nd that's its most recent low
it's got up to
2.11% as of today a 25 basis point move
the tenure in Germany was 2.08% on
December 2nd it's up to
2.48% as of today a 40 basis point move
which means that the 2-year 10e spread
has increased by 15 basis point from
from 22 basis points on December 2nd to
Now 37 basis basis points and it's been
as high as 40 so the yield curve is
steepening in Germany the same way that
we see here in the United States it
doesn't mean interest rates are going to
continue to rise or inflation
expectations are breaking out instead of
it's a curve steepening as it always
does in a
discontinuous process steepening doesn't
mean that rates go down in a straight
line all at once all parts of the curve
it's a dynamic situation where things
move back and forth so long-term
interest rates are rising in Europe the
same same as they are in US treasuries
whereas the fundamentals in Europe are
more clearly with the Euro and the
European banking system on that
downside believe it or not part of that
downside in includes the same thing that
we're talking about in Brazil for
example where Market participants are
becoming more and more concerned that
economic growth as weak as it is in
Europe compared to certainly Brazil
economic growth is being too heavily
influenced by governments government
spending is just propping everything up
and as certain governments especially in
Europe like France can look to try to
rein in some of their spending ways and
their deficit levels as they do so as
austerity creeps back into the
conversation what that might do to the
overall situation which is not good to
begin with so in France where the debate
over the budget has really reached a
really fever pitch because of the
economic situation continues to get
worse at the same time the political
situation is far from settled you have a
collision course where the politicians
don't want to cut back on the budget
because they're afraid of what will that
what might do to the real economy in the
short run in the long run it would
actually help but but also everything
else that we've been talking about in
the downside of the supply shock
France's new Finance Minister Eric
Lombard set out a slower pace of deficit
reduction a slower pace of deficit
reduction as he seeks to preserve
economic growth ensure political support
after the previous government was
toppled over its budget plan Lombard was
appointed last month to piece together a
2025 finance bill that can s
significantly reign in the deficit from
around 6.1% of economic output this year
while also garnering support in a
divided National Assembly if we target
5% it's more than a 1% gap which is
considerable and I think too much as we
also need to support the economy because
it keeps getting weaker and weaker
that's what Lombard said to France inter
radio so continuing with Lombard we are
targeting a deficit that would be
between five and 5 a half% and the
weakening economic situation is the same
one which is concerning the ECB and so
the government looks at all the economic
data coming in as the markets are and
says we can't cut our can't cut the
deficit because we believe that
government spending actually helps
support growth when in fact it's may be
the only thing holding growth up just
like in other places like Brazil and
maybe even the United
States the latest economic data from
France especially in terms of the labor
market are increasingly concerning
French joblessness the official
registered jobless claims increased by
139,000 in the 3 months September
through November so September October
and November at the same time payroll
growth in FL France has slowed way down
over the last several quarters so the
labor market is already taking a turn in
France just like we've seen in other
places like Germany Canada lack of
hiring there same as in the United
States at the same time economic
weakness has become more apparent across
Europe not just France I I focus on
France here because of the budget issue
and how pressing that is but as economic
weakness becomes more and more apparent
across Europe what that means is that
it's now on a collision course with what
the media is calling resurgent consumer
prices the fact that Consumer Price
disinflation never goes in a straight
line either as we're all too familiar
with over here in the United States
given how J Powell in the fomc reacts
like a cat following a tennis ball every
time the CPI decelerates and accelerates
as I showed in a in a Twitter video
every time the CPI in the US goes up the
dotts shift in that in that hawkish
direction every time the CPI dis
disinflate even more the dots follow and
go lower again it's not the same problem
in Europe as as far as as European
Central Bank is concerned they're at
least more confident on consumer prices
and more concerned about the labor
market and economic situation but that
won't stop given the latest CPI and hicp
data it won't stop the media from saying
the same things like inflation is in
danger of breaking out all over over
again over the last couple days in
Europe got National reports that
suggested somewhat of a mixed bag
National reports in recent days already
showed prices rising more strongly than
estimated in Germany and Spain while the
increase less than anticipated in France
and unexpectedly slowed in Italy a
separate report from the ECB showed that
inflation expectations of consumers
increased in November so you got German
consumer price rates that accelerated
along with Spain France continues to
undershoot and be weak given the
economic situation Italy unexpectedly
declined because Italy has been one of
the few economies in Europe that has
only slowed down a touch and it's not a
resurgent consumer price problem as much
as it is more clouding the issue as far
as the public and the media are
concerned the one to really pay
attention to that's Switzerland well not
a part of the Euro Zone it's certainly a
part of Europe geographically but not a
part of the European economy it is heav
affected by the European economy and is
Al often times a harbinger of things bad
things to come or positive things on the
recovery side when Europeans start the
European economy starts to really become
weak and credit isn't being extended by
the banking system the Swiss feel it and
they reported just today that Swiss
inflation fell again in December fueling
expectations for more interest rate Cuts
By The Swiss National Bank this year
that markets now view as virtually
certain Swiss Prices rose by just 6 t0
of a percent in December compared with a
year earlier according to figures from
the federal Statistics office down from
7/10 of a percent in November month on
Monon Swiss prices actually fell by a
tenth of a percent the SNB is concerned
about strong disinflationary risks
bringing the overall inflation rate
close to zero but also the weakness of
the Eurozone economy which will affect
Switzerland at least according to Euro
young Chief Economist at mirabo who
expects the SNB to cut rates by 25 basis
points in both March and June and take
its policy rate down to zero which would
be the first one of among the central
banks and that's exactly what certainly
longer dated swaps for example have been
pricing about all of central banks in
all of Europe and all of the all of the
rest of the world too in other words
that interest that interest rates are
going down because of the fundamental
reasons in central banks that eventually
realize it's not consumer prices that
need to be concerned about are moving
rates lower and that explains why
European banks are behaving So Def
defensively and buying so many
government bonds along the way while at
the same time despite lower interest
rates they're not lending sort of like
China so European banks are aggressively
in riskof defensive mode not lending not
really seeing any thing to that they
really want to expand their balance
sheets over instead the fundamentals
align with a a falling Euro which is not
about Jay versus Christine that is as
the even the mainstream media article
pointed out when you see the Euro hit
parody usually nothing good is going on
in the world certainly starting from
Europe at those times so the last thing
that European Banks would be doing if
they thought consumer prices were about
to get out of control is buying
government bonds the fact that they're
buying so heavily and bought so heavily
in November shows you exactly what the
banking system is worried about we
European banks are doing is every bit
consistent to say for example Chinese
Banks they're battening down the hatches
getting more and more defenses because
it's the fundamentals the same
fundamentals that got the Euro as weak
as it is heading toward parody which is
one of those signs that you only see
during some of the worst circumstances
so European Banks buying government
bonds at a rate we haven't seen since
2020 or 2011 2012 or 2008 2009 same as
the Euro which hasn't been par since
2022 but also those other periods as
well not a whole lot going on in Europe
but this is not just about Europe it's
globally synchronized downside of the
supply
shock speaking of Chinese Banks they are
the one thing that's really different in
China last year and probably this year
too