As I wrote the headline to this piece I was thinking to myself isn’t it always? Then maybe always is a bit overstating it as there was the “Euro boom” of 2017/18, but most of the time. One concern relates to my subject of Tuesday as I increasingly wonder at what level the ECB would intervene in “Le Spread”?
Le spread français. Never a good sign when you have to update these charts.
Those are the words of @fwred on Twitter or X and he is right.
His chart provides quite a perspective because in the left corner you see where those who made investments on a bond market convergence ( for example I recall the offshore par of Deutsche Bank investment doing so) had quite a success as to all intents and purposes French and German bond yields became the same. The problem as you can see was for those who remember BBC A Question of Sport what happens next? We see that what we might call “more Euro” in fact then led to wider bond spreads meaning the exact opposite of the promises of the Euro area founders.
Then I think we learn something from comparing “ECB PEPP” in 2021 with “ECB QE” in 2015 because the ECB had to throw at lot more at it in terms of scale of get approximately the same result in spread terms.Also if you think of the scale of the effort with 2 QE programmes running simultaneously I think it is revealing that it did not go back to zero again. After 2021 we see that overall “Le Spread” has been singing along with Paul Simon.
Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away.
It has led to speculation like this.
The ECB in it is necessary to “save Private Ryan”. Imperatively maintain the Yield Spread under 0.80%. After yesterday’s disastrous intervention by the Prime Minister, there will be work to do… ( Frederic Petit)
The ability of the ECB to buy is in reality rather limited as we are at a time of Quantitative Tightening or QT balance sheet reductions. So it could let more German bonds mature and not French ones. Although with the spread to Italy closing at a mere 0.08% last night it might find itself fighting on more than one front. But it can manipulate things a bit in the short-term.
Ir is not the only area where there is trouble and this is more directly on the patch of the ECB. From @jeuasommenulle on Tuesday.
It’s “only” the 2Y bond, but congrats, France, we did it, we’re the highest yield in the Eurozone and finally caught up with Italy !
Here is his table.
The reason it caught my eye is that whilst in theory the central bank interest-rate is overnight it exhibits a lot of influence or anchoring on the 2-year yield. As you can see Portugal for example is slightly below 2% suggesting the next move is down which seems likely to me. But whilst “Italy is Italy” may allay concerns about it being at 2.2% that is not so easy for France especially as combining the two is quite a bit of the Euro area economy where the ECB does not have its own interest-rate under full control.
As ever some have kept their sense of humour.
I haven’t felt this bad since Greece beat France 1–0 in UEFA Euro 2004. ( Disco Central Banker)
There is the additional issue of the ECB President Christine Lagarde not only being French but a former French finance minister so she will be especially keen to act here. Thus a repetition of her famous “we are not here to close spreads. This is not the function or the mission of the ECB.” is extremely unlikely.
Switzerland
The more eagle-eyed amongst you will have spotted that the Swiss 2-year has caught up with my theme that Switzerland is on its way back to negative interest-rates. Or if you prefer the answer posed by The Automatic below is yes.
What’s that coming over the hillIs it a monster? Is it a monster?
The reason that is on my mind is the quarterly GDP print of 0.1% this morning which may be the past but follows rather a plunge in the ZEW survey yesterday. The issue of tariff barriers with the US saw it fall to the sort of level it was back in April when people were more generally worried at tariffs. So with inflation as below we may be looking at cuts below the present 0% interest-rate rather than just one.
The consumer price index (CPI) remained unchanged in July 2025 compared with the previous month, at 107.8 points (December 2020 = 100). Inflation was +0.2% compared with the same month of the previous year. ( Federal Statistics Office)
Money Supply
This morning the ECB told us this.
Annual growth rate of broad monetary aggregate M3 stood at 3.4% in July 2025, after 3.3% in June 2025.
As a basic number it is a little middle of the road because if you assume 2% inflation and 1% economic growth you get not far off that number. But there are two nuances both being provided by the ECB itself. Firstly there is the sequence of seven interest-rate cuts that President Trump so envies. One would expect that to boost money supply growth via factors like these.
Annual growth rate of adjusted loans to households increased to 2.4% in July from 2.2% in June
Annual growth rate of adjusted loans to non-financial corporations stood at 2.8% in July, compared with 2.7% in June
Few things warm a central bankers heart more than funding higher house prices via more mortgage lending and lending to households has rallied from annual growth of 0.2% and 0.3% in early 2024 to the present level so more seems likely. For today’s purpose that seems set to boost the money supply more.
The second factor is that the ECB is also applying a brake to recorded money supply growth with its QT balance sheet reductions. It is a little opaque about the detail but the impact looks likely to take around 30 billion Euros a month away from its balance sheet and hence the money supply. Thus underlying growth is somewhat stronger than it looks.
Comment
As you can see the monetary picture remains risky because we have very little experience of a period of QT like this and it is mostly ignored by the media. So there remains an upside risk for inflation especially as economic growth looks set to struggle, Even ECB President Lagarde seemed to agree with the latter in her speech at Jackson Hole.
The European labour market has come through recent shocks in unexpectedly good shape, helped by a mix of global tailwinds and domestic strengths.
As ever the subject is the issue not the words. She is worried about the labour market. That then feeds into the other two issues I have looked at today. The potential widening of the interest-rate gap with the Swiss plus interest-rate cuts to help France. The catch in the latter is that the economic concept of “pushing on a string” has applied so far.
