The international distress call is going out from Europe as the overall eurozone unemployment rate reached 12.1%. Germany had a low rate of 5.4% while Spain was more than 27%. So how is the ECB to do deal with the huge discrepancy between the economic performance of its 17 members? If the austerians are being relegated to economic purgatory then the pressure on the ECB to act will be diminished. Cutting rates for the sake of a show of action will be a detraction from the bigger political issue. Why irritate the Bundesbank and Chancellor Merkel by moving the ECB lending rate by a measly 25 basis points?
Yesterday, I pointed out how low two-year notes in the peripherals have fallen and today I show the charts of Ireland (top left), Italy (top right), Spain (bottom left) and France (bottom right) so as to graphically depict the fall in rates since July 24. While the EU economy is in distress no reason to rile the Bundesbank.
On July 2, I wrote a blog post after a key summit in Brussels in which German Chancellor Merkel was bested by Italy’s Monti and Spain’s PM Rajoy. Merkel was forced to swallow hard and accept the European Stability Mechanism, which provided a European-wide bailout of the Spanish banks. This political defeat was not well received in Berlin. Germany is again under attack by the anti-austerity coalition and the “hornet’s nest is being kicked” so the ECB OUGHT not add to assault.
The present state in Europe is not solely about economics for the German election in September pollutes the landscape. Those who opine from a solely economic or financial perspective fail to understand the significance of MAY DAY. It is of no small matter that MAYDAY derives from the French, venez m’ aider, or “come help me.”
***The FOMC announces its interest rate decision tomorrow at 1:00 p.m. CST. There will be no change in the FED policy as the economic data has been mixed since sequestration has impacted economic growth. Until the U.S. clarifies its budget policy the FED will be cautious. A problem though for the Fed is that as the Treasury has less debt to sell, the impact of the large-scale bond buying is having a greater market impact so many the FED members will be forced to acknowledge that it may have to alter the amount of treasuries it buys versus mortgage-backed securities. Otherwise this will be a non-event and there is no Bernanke press conference scheduled.