ECB: Bundesbank On Outlook For Structural Liquidity Needs
The Bundesbank gives some views on the future development of the ECB's balance sheet as well as the setup of future structured operations as part of a broader regular monthly report. The below is translated from German with MNI emphasis in bold. The still open nature of structural considerations shouldn't be a surprise (see comments from Cipollone below) although the Bundesbank hints at perhaps an even longer wait to see them.
- "Operations are to be introduced in the future that will contribute significantly to meeting the structural liquidity needs of the banking system. In addition to separate structural longer-term refinancing operations, this will also include a structural portfolio. The design of these structural operations is currently still open. From the Bundesbank's point of view, appropriately designed structural refinancing operations will be able to cover the majority of the banking system's structural liquidity needs in the future. However, such operations are likely to be introduced at a later date, as the banking system is expected to have a structural liquidity surplus vis-à-vis the Eurosystem for several years to come. The Bundesbank expects structural refinancing operations to be introduced before a structural portfolio is established."
- "In the coming years, the Eurosystem’s balance sheet is expected to shrink significantly, mainly because the securities purchased by the Eurosystem since 2014 under its monetary policy asset purchase programs will gradually mature, while demand in the regular monetary policy refinancing operations is likely to increase slowly at first from a very low level. The Eurosystem estimates excess liquidity at around €1,500 billion at the end of 2027 (with monetary policy securities holdings still at around €2,800 billion). However, future excess liquidity resulting from the aggregate demand of monetary policy counterparties for main refinancing operations and longer-term refinancing operations is likely to be lower."
- ECB's Cipollone told MNI at an event in February that the ECB will reassess its position on the structural portfolio in 2026 as liquidity needs are currently fulfilled by the legacy portfolios. When asked his preference on weights between structural bond portfolio and structural refi operations in the future, "my personal preference is we should provide banks with sufficient liquidity in a structural way so that they have enough reserves to face unforeseen volatility, but also reserves they can count on to extend credit to the economy."
- For the latest look at ECB balance sheet developments, see our weekly tracker, here.
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RATINGS: Moody's Downgrades US's AAA Rating As Deficits Seen Ballooning
Moody's has downgraded the US's long-term credit rating to Aa1 trom Aaa. The move may not have been fully expected today. But it was the last holdout among they S&P and Fitch to demote the USA from the top rating, and they placed negative outlook on the US last year (now stable). Fiscal deterioration, both past and anticipated as Congress wrangles with the Republican fiscal bill, is cited as the key factor. From the release (link):
- “While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics."
- "This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns...We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration."
- "If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade. As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation."
- "We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024."
- "Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns."
US FISCAL: "Extraordinary Measures" Continue To Dwindle Amid Debt Impasse
The "extraordinary measures" available to Treasury to stave off a debt default were down to $82B as of May 14, per a Treasury Department release today.
- That compares unfavorably with a high of $335B in January when the debt limit impasse began. Combined with $562B in Treasury cash on hand, though, after April's large tax intakes, that makes for around $644B in available resources before the "x-date" is reached.
- Resources are gradually being eroded since reaching nearly $800B in mid-April.
- Per Tsy Sec Bessent's letter to Congress last week, "after reviewing receipts from the recent April tax filing season, there is a reasonable probability that the federal government's cash and extraordinary measures will be exhausted in August while Congress is scheduled to be in recess. Therefore, I respectfully urge Congress to increase or suspend the debt limit by mid-July, before its scheduled break, to protect the full faith and credit of the United States."
CANADA DATA: Sales Activity Points To Potential Marking Up Of GDP Ests
There was mixed news on the housing and wholesale/manufacturing sales fronts this week, which on net look to slightly upwardly bias Q1 GDP estimates, pending next week's retail sales reading.
Housing starts blew through expectations at 278.6k in April (226.2k expected, 214.2k prior). This came after building permits fell a worse-than-expected 4.1% M/M in March as reported Wednesday.
- Meanwhile, he Canadian Real Estate Association reported existing home says April sales unexpectedly contracted -0.1% M/M (+1.0% expected, -4.8% prior). Sales are now down 9.8% Y/Y, while prices fell 1.2% M/M (3.6% Y/Y on the price index). (Link)
- Overall, confidence appears subdued, which is likely to translate into subdued activity.
On the sales front, March data was soft but positive versus expectations and could add a slight upward drift to Q1 GDP expectations.
- Manufacturing sales were less negative than expected at -1.4% M/M (-1.9% expected/flash estimate, -0.2% prior rev up 0.4pp). The decline was led by primary metals -6.5%, an area hit by U.S. tariffs, and oil -4.2%. Overall Q1 factory sales grew +1.6% vs prior +1.1%.(Link)
- Wholesales ex-petroleum and grains rose 0.2% in March, vs the advance estimate / consensus -0.3%. Sales volumes fell 0.3%. Overall Q1 wholesales rose 2.5%, led by machinery/equipment and autos/parts.
