Tomorrow will bring interest rate announcements from two key central banks, okay three , if we count the BOJ but the Japanese have so many problems it is a forgone conclusion that Mr. SHIRAKAWA will hold the line and, if anything, find away to flood the market with more liquidity. The Bank of England (BOE) will announce at 6:00 a.m. Chicago time. Though there are a few analysts who think the Mervyn King-led BANK will raise to head off the increase in inflation, I would say that the chances are maybe 5 percent.
The European Central Bank (ECB) will announce at 6:45 a.m. and the markets have priced in a 100 percent probability, therefore a sure thing. I will provide some words of caution. Trichet and company despise speculators, traders and investors for they have a tendency to spoil the well laid plans of European bureaucrats. If the ECB mandarins could find a comfortable way to not raise rates and momentarily screw the money markets and all its actors, they would in a heartbeat. If Mr. Trichet could say that the EURO was so strong that the bank decided to hold off raising, he would.
Better yet, let’s suppose that after all the cajoling by Brussels, Portugal finally decided to take the bailout that they had been refusing, the day before a significant ECB meeting. I have to ask if Prime Minister Socrates made a deal to take EURO funding so as to prevent a RATE RISE. Remember that the ECB is very irritated that it has to hold the BONDS it bought from Greece and Ireland–it tried to make a deal to unload them in the deal crafted on March 25 but was rebuffed. If Portugal failed to take a bailout, the ECB stood to acquire even more of the PIIGS’ DEBT.
Spain may have pushed Lisbon to negotiate a hold on rates by accepting a last minute bailout for no one will be more harmed by an increase in the EURIBOR RATE than Spain. It seems that more than 90 percent of Spanish mortgages are adjustable to EURIBOR, so a VIGILANT ECB IS SPAIN’S TORQUEMADA. Any time the markets are pricing a SURE THING, it is imperative to look beyond the headlines to see where the consensus is wrong. THAT IS WHY THIS IS NOTES FROM UNDERGROUND WHERE 2+2=5.
If the ECB were to check rather then raise short term rates will rally, equities will rally, precious metals rally. The EURO will initially sell off against all currencies but the test will be at which levels of support it would hold because ultimately it is still about the FED and the DOLLAR. This is a low probability outcome that I have outlined but it just makes traders aware of alternative policy action. The one thing we know is the Portugal took the package that had been an offer for quite awhile and did it the night before an ECB meeting. Interestingly, Portugal has consistently stated that it had enough funds to meet the April redemptions. It was June that COULD BE a problem. Just food for thought!
Also, I am doing a quick post of the 2/10 yield curve for different countries just as a refresher (data courtesy of Bloomberg):
Portugal: 16- (inverted)
Greece: 286- (inverted)