Your weekly economic update from the team at FXD Capital


Negative rates for depositors are back in the spotlight after two separate newsworthy events this week.

The first comes from the US, with cash-rich banks starting to consider imposing discretionary caps on corporate deposit inflows. JPMorgan Chase and Citigroup, in particular, are directing clients to asset management divisions to find solutions within money market funds in attempts to curtail further balance sheet growth. Along with Bank of America, the top three banks have almost $4 trillion of deposits, increasing by over $1 trillion in a year.

Regulatory exceptions introduced after the Covid-19-induced liquidity crisis last April allowed banks to exclude US Treasury bonds and Federal Reserve deposits from supplementary leverage ratios. The relief has now since lapsed, which is heaping pressure on banks to turn off deposit spigots. Appetite for loans is not running at the same pace as deposit growth, and surplus deposits end up running a deadweight loss for larger banks, requiring capital buffers and suppressing return on equity.

The shift towards money market funds as a source for corporate deposit solutions is a trend that will only continue. Likewise, the strategic nature of deposits as a loss-maker to elicit more lucrative business will become even more prominent. Those lucky to get a place on the balance sheets of prime banks will be there because the relationship likely extends into other institutional areas.

We then shift to Europe, specifically Denmark, an economy long encumbered with negative rates. Because of the Krone’s peg to the Euro, Danish monetary policy has to follow the coattails of the ECB diligently. Throughout the eurozone debt crises of the past decade, investors sought refuge in Danish markets: a prudently run economy with a requisite strong credit rating. Denmark is a correlated proxy to the eurozone in terms of trading patterns, the currency peg and the added bonus of Danmarks Nationalbank having complete control over rates and printing.

Danish rates have subsequently run negative for some time now in an attempt to curtail money flows. The incidence has even seeped through into retail borrowing rates, with Jyske Bank launching a 10-year fixed-rate mortgage at -0.5% in 2019.

The reason for this run-through on everything Danish is because Danske Bank recently halved its threshold for imposing negative rates on retail depositors. Before the announcement, those saving more than DKK 200,000 (~£23,000) would pay -0.6% on balances; this has now been cut by half. The news is interesting because this is on retail savers, typically the final holdouts on negative rates due to the potential for adverse PR. The threshold is also relatively low. Psychologically we seem repulsed by paying for banking services, and paying interest on deposits is high on that list. Yet, we all need savings and buffer cash for times of emergency.

What’s happening in Denmark is that savers are being encouraged very directly to spend cash savings or invest it in other instruments. The generous social security net offered to Danes makes this a plausible situation, in terms of justifying running a low personal savings rate, due to the protection afforded by the state during times of joblessness.


The Bank of England expects the UK economy to grow 7.25% in 2021, representing a 50% increase from its prediction three months ago. As rates were unanimously held firm at 0.1% in its May meeting, the MPC noted that inflation would be observed judiciously over the coming months. Also noteworthy was the committee having majority opinion that tax increases and lower public spending would be the main drivers to reduce inflation.


Comments by Janet Yellen lead to a panic selloff across markets this week. On Tuesday, the US Treasury secretary warned that rates might need to rise to keep the US economy from overheating. Following the comments, growth stocks – particularly technology ones – sold off en masse, despite 10-year yields barely nudging. Tech stocks are the central inflation “proxy” at the moment, as they are seen as long-duration assets, with the optimistic long-dated cash flows of growth prospects greatly affected by changes to discount rates.

Following the market callisthenics, Yellen was compelled (or forced?) to backtrack on her comments by stating that a rate increase is “not something I’m predicting or recommending … If anyone appreciates the independence of the Federal Reserve, I think that person is me.”

Nonfarm payrolls print today and are likely to further the rapid US recovery narrative.


Despite falling into a double-dip recession, surging production levels show that momentum is building towards a eurozone recovery. IHS Markit’s PMI readings for manufacturing rose to their highest levels since records began in 1997, printing at 62.9 in April. Manufacturing is a critical metric for Europe, with Germany and Italy, in particular, being large economies dominated by the industry,

All the best for the week ahead,



Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.

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