Popular wisdom reminds us that in life, exams never end. A warning that the German Constitutional Court has made its own with great and Teutonic rigor, given that a short time ago – through its website – it made known as tomorrow morning at 9.30 he will publish the review opinion on the decision on the lawfulness of the Bundesbank’s participation in the Pepp, the anti-pandemic intervention plan. A formality, according to many. But not for Lucas Guttenberg, deputy director of the Jacques Delors Institut of the Hertie School in Berlin: in fact, the Court must offer a final and reasoned opinion with respect to its previous decision, writing a final word on the age-old question relating to compliance with the ECB mandate.
Here are Guttenberg’s words: If this does not happen (very unlikely but not impossible), it could ask the Bundesbank to block its participation in the PSP. That is, not only to the purchase program launched in March 2020 as a response to the pandemic, but to the main pillar of the entire QE of the European Central Bank, that App (Asset Purchase Program) launched by Mario Draghi as a bazooka of the strategy of Whatever it takes. In fact, an absolute earthquake. Precisely for this reason, practically impossible. But many, albeit in a whisper, suggest that the Karlsruhe togates would be working in tandem with the Bundesbank to get what Jens Weidmann cares about most: a clear indication of the normalization of monetary policy, already at the board of 10 June.
And if the increase in the yield of the Bund recorded in the last few days already appears intuitively the detonator of this timing of publication not very random (so much so that it has triggered a sort of pre-alarm in view of the red line positive return of the ten-year yield), this graph
shows how a possible constitutional hitch in Germany, even if only formal, it could trigger a principle of real sell-off on Italian debt. Which, for days, continues to rise. And after exceeding the 1% yield mark, today it has reached 50 basis points of increase from the lows recorded between December 2020 and March of this year. And this is not about Dragons effect gone, it is something much more substantial.
As this other graph shows,
since the Italian member of the ECB Council, Fabio Panetta, launched his appeal for the continuation of Eurotower operations that would maintain practically favorable financial conditions open-ended, the yield trend continued to rise. For everyone: Germany, Italy, Spain, France. And even the ten-year GDP weighted for the eurozone. The market is seriously beginning to question how much the ECB will be able to structurally finance uncontrolled debts and deficits. And Bund sales these days seem to underline a growing insistence on asking that question, almost a still controlled principle of panic.
Bad condition that fits into an even worse situation, since if that jump in yields should paradoxically push the ECB to increase purchases on 10 June, the latest macro prospects of the eurozone and above all the inflation projections would point to a “Trichet moment” now upon us. And these two graphs
show a further criticality that emerged just today, when the data relating to the Pepp purchases last week was published. If in fact the share of 3.8 billion euro of daily turnover appears higher than the average but certainly not in line with the initial phase of the anti-pandemic program, net of Christine Lagarde’s promise of acceleration during the second quarter, the second image shows how weekly purchases with reference to the largest combined Pepp and Pspp (6.7 billion equivalent for the latter) were the second largest since the beginning of the year. In short, the ECB is shielding more, without exceeding. Despite this, our spread continues to rise.
And the trend of this first day of the week shows how the Eurotower almost certainly intervened with purchases, since in the face of an intraday maximum reached the threshold of 130 basis points, from lunchtime onwards the trend was that of a readjustment towards the less alarming area of 120. And we know that, normally, the ECB intervenes on the secondary sector between 2.00 pm and 3.00 pm, except in emergencies. In short, that of 10 June really risks being a passage from caudine forks, given the need to bring together the now diametrically opposed monetary policy approaches between Germany and the Northern area on the one hand and the so-called Club Med plus France on the other.
Someone must necessarily accept the defeat and humiliation of the passage under the yoke of reality. Obviously, the move of the Karlsruhe court with respect to the publication of its final judgment is fully part of the war of nerves taking place between the two sides of Frankfurt, the ECB and the Bundesbank. A fact remains, much more serious even than a possible hesitation of the red robes of the Constitutional Court tomorrow morning: the market, the real one that bets money and does not want to lose it, has begun to take seriously the problem of the day-after with respect to a reduction in purchases which will coincide with a relaxation of the defenses with respect to deficits and debts such as the Italian and Spanish ones. Goosebumps. And this time it will take much more than a formal reassurance from Christine Lagarde to bring it back to more mild and optimistic investment outlook.