6 key takeaways from European Central Bank’s QE bazooka

Published: Mar 10, 2016 12:38 p.m. ET

New targeted bank loans ‘very credit positive’ MarketWatch photo illustration/Getty Images, Everett Collection ECB President Mario Draghi brings out the bazooka. By William Watts Deputy markets editor European Central Bank President Mario Draghi and his policy-making compatriots delivered a bigger-than-expected stimulus plan Thursday, but also signaled that policy makers aren’t likely to further cut interest rates—sending a mixed signal to investors. Markets were initially jolted after the ECB not only cut key interest rates and expanded the size and scope of the bank’s quantitative-easing program, but also announced a new round of cheap (in fact, the ECB could pay banks to take the money), long-term loans for eurozone banks—all part of a bid to reflate an economy that’s flirting dangerously with deflation.

See: Live blog recap: European Central Bank cuts rates, ramps up QE. Financial markets reacted favorably—at least at first. European banks soared and the euro tumbled. European stocks SXXP, -1.66% in general and U.S. stock-index futures also legged higher, while European government bond yields, particularly on the periphery, dived. But the euro soon turned around, rather violently, shooting higher versus the dollar about halfway through Draghi’s news conference. European stocks ended lower and Wall Street also headed south, tracking a drop in oil prices. Here’s what Germany’s DAX DAX, -0.59% did, closing down 2.3% to 9,498.15 The most interesting wrinkle was the ECB’s decision to launch four rounds of what are known as targeted longer-term refinancing operations, or TLTROs. That’s a mouthful, but essentially these are long-term loans (in this case with a maturity of four years) to banks that are specifically aimed at jump starting lending activity. The larger a bank’s outstanding loan book, the bigger the loans. Initially, banks will borrow at 0%, but that will drop into negative territory—as low as minus 0.4%— the more the bank lends. “In other words, the ECB could pay banks to borrow. This is very credit-positive,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto. Increasing lending activity is crucial to spurring and, most important to the ECB, reflating the eurozone economy. More QE The ECB significantly expanded its bond-buying program. The decision to ramp up the size of its monthly purchases to €80 billion ($89.1 billion) from €60 billion wasn’t a huge surprise. Less widely anticipated was the ECB’s decision to expand the eligible assets to include investment-grade, euro-denominated corporate bonds from outside the financial sector. “This is an extremely aggressive signal, since it shows that the ECB is willing to take on potentially significant credit risk in order to fulfill its mandate to raise inflation to its target,” said Bill Adams, senior international economist at PNC Financial Services Group. Rate cuts The ECB cut its benchmark lending rate to zero from a paltry 0.05% and, in a more closely watched move, lowered its deposit rate to minus 0.4% from minus 0.3%. The cut in the deposit rate was smaller than some economists had penciled in, but disappointment was partly offset by the refi rate cut and a lowering of the marginal lending rate to 0.25%. The negative deposit rate means banks pay the ECB to park funds overnight at the central bank. Negative interest rates in Europe and Japan have confounded economists and investors. While designed to fight disinflationary pressures by discouraging money hoarding, many fear negative rates are counterproductive in that they can damage bank profitability and undercut lending activity. The ECB’s decision to offset TLTROs at potentially negative rates is viewed as an attempt to address that issue: No more cuts? Draghi specifically pushed back against talk the ECB and other global central banks are running out of tools, telling reporters that ECB policy makers have shown “that we are not short of ammunition.” But Draghi also said the ECB doesn’t anticipate a need to cut rates further. While that may sound like typical central-banker-speak after delivering a new round of stimulus, market participants appeared to take it as a signal that rates are near the lower bound, contributing to a sharp reversal by the euro EURUSD, +1.7002% and a selloff in European government bonds, sending yields higher. Even with Thursday’s expansion, the ECB’s asset-buying plan is still smaller than those undertaken by the Federal Reserve and Bank of England, said Jonathan Loynes, chief European economist at Capital Economics, in a note. “Accordingly, we suspect that the ECB’s work is still not done.” Low for a long, long time Not surprising, ECB staff economists lowered their forecasts for both growth and inflation. Of particular note, in their first projection for 2018, they pegged annual inflation at just 1.6%—still well below the ECB’s target of near but just below 2%. Draghi emphasized that rates are going to remain low for a very long time, but insisted that the eurozone economy isn’t in the grips of deflation. While the inflation rate fell to minus 0.2% in February and is likely to remain negative in coming months due to falling oil prices, it is expected to turn positive by year-end. Nonetheless, a 1.6% inflation projection for 2018 was viewed as quite dovish. Central bankers can’t save the world by themselves Draghi has often emphasized that the ECB, despite his “whatever-it-takes” rhetoric, can’t do all of the heavy lifting. Draghi on Thursday amplified his call for a more aggressive fiscal response, specifically calling for increased infrastructure spending and other measures aimed at boosting productivity. With the effectiveness of monetary policy “clearly diminishing,” Draghi “threw down the gauntlet to fiscal policy makers today, arguing for infrastructure spending while lowering the ECB’s own growth forecasts,” said Alasdair Cavalla, economist at the Center for Economics and Business Research, a London-based forecasting and analysis firm.

J.P. Morgan’s Jamie Dimon joins the ex-billionaires club

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As emissions rise, China loses moral high ground

As emissions rise, China loses moral high ground:
For years China has dismissed concerns about its rising carbon emissions by pointing out that, on a per-capita basis, Chinese citizens still emit far less than their counterparts in the industrialized world. But now that China’s per-capita emissions are on par with those of the European Union, that argument will be much harder to make.
This dynamic is beautifully illustrated in the graph at top-right, included in an analysis of 2011 emissions released Wednesday by the European Commission’s Joint Research Centre and the PBL Netherlands Environmental Assessment Agency. The data comes from the Emissions Database for Global Atmospheric Research (EDGAR) and covers carbon dioxide emissions from fossil fuels as well as cement production.
Overall, the trend remains troublingly stable with 3 percent growth in 2011, down from an eye-popping 5.8-percent increase in 2010 (Trend Watch). At roughly 34 billion tonnes, the global total is slightly higher than an earlier estimate produced by the International Energy Agency (partly explained by the fact that the PBL/JRC report also includes emissions from international transport). The EDGAR database also lines up with the higher estimates by researchers who questioned China’s national carbon dioxide emissions inventory in a study published by Nature Climate Change in May.
China’s per-capita emissions remain well below those of the United States, despite the fact that US has registered the largest drop of all. This discrepancy could provide Chinese negotiators continued political leverage as the two super-emitters face off in the international climate negotiations, but the pressure on China will only increase as it overtakes Europe, likely this year.
Graphic Source: PBL/JRC

California university asks for its own board

California university asks for its own board:
The University of California, San Francisco (UCSF), today released a series of proposals aimed at fixing finances at the biomedical powerhouse. Although UCSF receives more grants from the US National Institutes of Health than any other public institution, it is still struggling to stay above water. Under historic growth rates in revenues and expenses, UCSF would be in the red by 2015. In January, UCSF Chancellor Susan Desmond-Hellmann created a working group to explore new governance structures and financial relationships with the greater UC system.
Among the group’s proposals are establishing a UCSF-specific board, a venture development fund and bond-funded investments. It also recommended a new way of determining the funds UCSF pays into the UC Office of the President (UCOP).
However, Desmond-Hellmann brought up only the most moderate part of these recommendations at a meeting before the UC regents today. She proposed establishing a volunteer UCSF advisory board to act as strategic partner, provide access to extraordinary expertise and focus management on the most important issues to the university.
In four to six months, Desmond-Hellmann plans to return to the regents with plans for a board charter and membership. She emphasized repeatedly that UCSF did not want to break away from the UC system and that she could recruit better board members if regents were likely to support a board’s recommendations.
The regents responded enthusiastically, praising research the working group had done and saying that other UC campuses could follow this example. “It’s a small step, it is a good step, and a reasonable step, and could serve as a pilot for other campuses,” said regent Bonnie Reiss. UC president Mark Yudof said Desmond-Hellmann had done “a superb job”. Still, the move is controversial. Left unsaid at the meeting were concerns that UCSF was moving to more independence and that other campuses might follow. (See Biomedical campus seeks freer rein.)
Although not discussed at the regents’ meeting, the working group report also outlined more radical moves, such as ceding some decision-making authority to the board and introducing “entrepreneurial” financing options. One would be the creation of “a long-term quasi-endowment fund to support tech transfer”. This fund, along with private funds, would be invested in UC spin-off companies and intellectual property. Returns from these investments would then be reinvested into the fund.
Another financing option involves US$50 million of proceeds from Century Bonds, which were sold this February to bring funds into the UC system. These would be combined with $50 million raised from donors to create a $100 million investment in the UCSF Foundation, with earnings that could be funneled into financial aid.
Finally, the working group wants to change how UCSF contributes to the UC budget. At present, each of the ten UC campuses contributes to UCOP based on its overall budget. UCOP manages undergraduate admissions, retirement and health-care benefits, and provides centralized banking and accounting services. According to the working group report, UCSF consumes less than 10% of service but pays for 18%. In addition, UCOP has compensated for budget cuts by approving increases in tuition. Since tuition makes up less than 1% of UCSF’s budget, this strategy would not work for UCSF. The working group proposed smaller cuts to UCSF during shortfalls as well as smaller increases if state funding recovers.
Desmond-Hellmann appears to have been strategic about obtaining buy-in from the regents. Five of the 13 members of the regent-approved working group designing the proposals are regents or executives at the UCOP. Several UCSF and UCOP officers sat lined up beside her as she addressed the regents.
Meanwhile the UC regents continue to face criticism for proposals to meet budget shortfalls with tuition increases. Before the meeting, a group of students dressed as zombies held a protest, saying that debt and fees were killing public education.

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Dimon Takes Heat on Hill - Wall Street Journal

Dimon Takes Heat on Hill - Wall Street Journal:

Wall Street Journal

Dimon Takes Heat on Hill Wall Street Journal By ALAN ZIBEL And JESSICA HOLZER WASHINGTON—JP Morgan Chase & Co. Chief Executive James Dimon sparred with lawmakers of both parties as an appearance in the US House of Representatives proved more contentious than his Senate hearing last week. Dimon says JPMorgan was honest with shareholdersReuters Fed Born of Morgan's Bailout Scrutinized After Dimon's LossBloomberg Dimon Tells Lawmakers JPM Complied With Disclosure RuleBusinessweek CNNMoney -San Francisco Chronicle -Los Angeles Times all 370 news articles »

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Student loans: 5 steps to pay down your debt

Student loans: 5 steps to pay down your debt:
Student loans should be paramount in your mind  if you've recently graduated college.  The school halls are empty, the weekly speeches for your English class are complete, and you’re cleaning up after your graduation party. Now comes the hard part: paying for the education that you’ve just completed. Where to begin? Collect all your loan paperwork and then follow these five smart steps to paying off your student loans.
– Maura Kastberg is a financial-aid expert and director of student enrollment at RSC, Your College Prep Expert, a college- and career-prep service based in Schenectady, N.Y.