Wednesday brings the FOMC announcement on interest rates. Can the FED really ease more at this juncture? It seems that the financial world has come to believe that Draghi’s comments from last week were intended to prod the Bernanke-led FED to promote a greater monetary response to a drastically imploding debt crisis in Europe. I don’t believe that Chairman Bernanke will be pushed into further monetary action–outside of some kind of extended language–for the FED wants to keep the onus where it belongs … the POLITICAL POLICY ARENA. If Bernanke were to get aggressive at this juncture, the controllers of fiscal policy would get an election pass and the REPUBLIC WOULD BE ILL SERVED. The pundits are all opining that the FED’S non-action will result in a dramatic sell off of RISK. I think that is a wrong read as a passive statement will put pressure on Congress and the White House to actually take the lead and find some compromise to the FISCAL CLIFF SYNDROME.
Archive for July, 2012
No real news out of the Geithner meetings. Schaeuble and Geithner offer up the same vapid phrases but interesting that the Geithner/Draghi meeting in Frankfurt yielded no news and it seems to be a blackout. Geithner and Draghi are two very verbose policymakers but as of yet … nothing. This evening though the S&Ps have regained all of today’s losses, which is very minor as the day was unusually quiet. The month end is tomorrow so fund managers will probably window dress as the S&Ps attempt to hold on to a 2% gain for the month.
In the realm of loving and promoting the irrational over the rational expectations of the MODEL BUILDERS, there is no better poster child than German Finance Minister Wolfgang Schaeuble. As I warned Mario Draghi to unpack his speedo, today BLOOMBERG NEWS ran an article, “SCHAEUBLE DECLARES MARKETS WRONG AS EUROPE COASTS INTO VACATION.” This is the German finance minister who has the audacity to proclaim that the markets are wrong and head off for vacation. It seems that the German hierarchy is convinced that all is well because the BUND market is healthy. Is Schaeuble so naive as to think that strong BUNDS reflect the health of Europe? Don’t German policymakers understand that the BUNDS and SCHATZ are at absurdly low levels because many other Europeans are “packing their suitcases” with EUROS so as to transfer their wealth to the perceived safety of the German financial system and thus for its haven status? It is astounding that the EUROCRATS believe that the markets will wait for the decision makers to return before any further market action will take place.
The ECB will be visiting Spain but it will not be heading to the beaches. The EUROPEAN DEBT markets were a problem today and not because of the SPANISH 10-YEAR. Today it was the SPANISH TWO-YEAR NOTE that bore the brunt of investor angst. The short-duration paper was 88 BASIS POINTS higher as the 2/10 curve collapsed 55 basis points: FRANKFURT WE HAVE A PROBLEM. President Draghi, as an ex-GOLDMAN banker you well understand that when the markets sense weakness an attack on the soft spot is imminent. The action in the SPANISH DEBT markets is the first warning sign.
All eyes are on Europe: And I am not talking about the wide, wide world of sports. It seems that the European financial situation has “worsened” as the Spanish yields exploded on Friday sending the Euro stock markets into a sizable selloff. Remember the outcome of the June 29-30 meeting of the Euro policymakers? All the EUROCRATS were celebrating the victory of PRIME MINISTERS RAJOY AND MONTI‘s victory over the IRON CHANCELLOR, Frau Merkel. It now seems that the victory was PYRRHIC as the markets are now testing the resolve of the ECB, EU FIN MINS and, ultimately, the IMF. As with any TROIKA, if all the horses are not pulling together the wagon is very unstable.
Today’s SEMIANNUAL MONETARY POLICY REPORT TO THE SENATE: All posturing and no substance. In the usual scene of playing for the folks back home, Chairman Bernanke was lectured to about the need to do his job and feed the system with so much liquidity that “job growth” would have to take place. (Mr. Schumer, to you a copy of the work of Richard Koo and the concept of a balance sheet recession). Some Senators were berating Bernanke for the LIBOR scandal in an effort to show that the U.S. Congress was serious about banking abuses. For the record: When the banking sector is under stress the FED’s only concern is the repair of banking balance sheets and if the profits come from manipulating the setting of a short-term bank rate, the means justifies the ends.
Today’s RETAIL SALES report was far weaker than anticipated. With Bernanke testifying to CONGRESS (Senate on Tuesday, House Wednesday), will the FED Chairman reveal anything to the “FOOLS ON THE HILL” as the knives will be out as politicians need to be seen as pressuring the FED for the voters back home. As previously reported, the June’s FOMC MINUTES revealed, “Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery.”