Today, ECB President Draghi spoke to the Frankfurt Chamber of Commerce and proclaimed that the DARKEST CLOUDS OVER THE EUROZONE HAVE PASSED. Yes, since the July 26 pronouncement that the ECB would do anything to preserve the euro and its financial system–and also there would be “no taboos” on what the ECB could utilize to save the euro. The markets have certainly quieted, as has been reflected in the Italian and Spanish debt markets, as well as the equity markets across the European Union. In my opinion Mr. Draghi should not put away his boots and umbrella as some clouds may have passed but the radar is citing other severe fronts. President Draghi added in the Reuters piece: “But there is simply no alternative to the path of reform. Despite the good progress so far showing that adjustment is happening, reform efforts need to be sustained …. Countries need competitiveness to sustain growth.”
These are nothing but empty platitudes on the part of Draghi to assure Germans that even though the ECB has provided vast monetary support, it is still incumbent upon the debt troubled nations to proceed on the path of austerity and reform. What reforms are we talking about Mario, with unemployment at 26% in Spain and rising in Italy and France? And where is that competitiveness going to come from? The crushing of wages in each country? What about the fact the EURO has appreciated 10% since the famous July speech? When the Japanese decided to jawbone the market, the YEN fell 12% while the Draghi intervention plan has caused the EURO to rally 12%. Something is askew in global currency markets in its reaction to central bank actions. It will be interesting to see how Draghi puts his platitudes into some action. What will Mr. Draghi do next to “chase the clouds away?”
***Tomorrow the Bank of Canada will announce its interest rate decision. Consensus is for no change and the OVERNIGHT RATE to remain at 1%. The BOC and Mark Carney have a problem because the unemployment data remains strong but other economic indicators are softening. Today’s retail sales were soft and other numbers have also reflected the impact of a strong Canadian dollar (Loonie). The Canadian government has been trying to slow the building boom by enacting more stringent regulations but the ultra-low interest rates make the regulations less stringent.
The Canadian yield curve continues to remain at a relatively flat slope–a mere +73 basis points. This is actually indicating that the BOC actually may be a little too tight with the TWO-YEAR NOTE in Canada yielding 1.18%, but the BOC’S hands are tied because of the housing market. So far the BOC has refrained from intervening in the currency markets, but if the Germans are right in their discussions of a global currency war, will the Canadians be able to sit on the sidelines (Especially if the Swiss National Bank was to become more heavily weighted in the LOONIE.)
***Toshiro Muto, the current Deputy Governor of the Bank of Japan (and desirous of replacing present Governor Shirakawa), was quoted as saying in regards to present BOJ policy: “I don’t think it’s right to consider any measure as TABOO as the flexibility or boldness of monetary policy will be lost.” I find it a great coincidence that the BOJ deputy governor chooses the same words as the ECB‘s Mario Draghi to express the tenacity of its bank monetary policy. The world’s central banks are closely monitoring each other’s rhetoric and utilizing each other’s tools. If Mario Draghi believes that the G-20 agreement on currency intervention is still in place, I have a brand new Lexus he can buy.
***U.K. Prime Minister David Cameron is giving a speech tomorrow in London in which he is supposedly going to offer a referendum on whether the U.K. will be a full member of the EU–it will be a straight up or down vote. Rumors abound that it will be presented in the next Parliament, around 2017. Cynics note the ploy by the prime minister to try to ward off the Eurosceptic wing of the Conservative Party and thus bring them into the fold for the next election. I am even more cynical than the British pundits. I think that by Cameron calling a national referendum on Britain in the EU, Cameron hopes to force the Germans and others to have to call national referendums. The German electorate has never been asked their choice on the EU and if the EU‘s economy continues to be a drag on the German populace and its purse, then Cameron’s ploy will cause electoral chaos throughout Europe–just another variable to think about.