This week has been loaded with FED OFFICIALS filling the airwaves with thoughts about ending QE or just tapering, with the markets left to discern how, when and how much. Today, the NY FED President presented a speech at the Japan Society in New York City, titled, “Lessons at the Zero Bound: The Japanese and U.S. Experience.” President Dudley compared and contrasted the mistakes made by the Japanese and U.S. monetary authorities and what they had been able to learn from each other. The speech was not critical about recent Japanese monetary moves, which infers that the FED is very comfortable with current BOJ policy. The NYFRB president does tell seem to support Chairman Bernanke in being a ’37er, meaning the FED cannot allow the mistakes made in 1937 by the U.S. Treasury and Federal Reserve Board to recur. This belief emphasizes that deflation is the most powerful variable that can disrupt the political economy.
Archive for the ‘Central Banks’ Category
Notes From Underground: Everybody Is Talking At Me, Can’t Hear a Word They’re Saying (Only the Echoes of the Bonds)May 21, 2013
There were no real market-moving news stories this past week, but that didn’t stop the precious metals from coming under severe pressure on the Asian opening as prices in gold and, especially silver, fell prey to liquidation and downside stops were elected in a relatively illiquid market environment. The DOLLAR/YEN was also under initial pressure as Japanese Economics Minister Akira Amari was on the Sunday morning Japanese news show saying, “the correction of the strong yen is largely completed.” Mr. Amari was voicing concerns about further rapid yen depreciation could negatively impact Japanese consumers. The selloff in DOLLAR/YEN seems to be rather tepid based on the massive LONG DOLLAR/YEN POSITIONS, but this bares watching when Europe and the U.S. markets open. More importantly, the initial price action in the Nikkei equity market doesn’t seem to be very concerned about the comments of Mr. Amari.
Notes From Underground will resume Thursday night. I wanted to issue an old piece from the day after the Jackson Hole Symposium of August 2012. It refreshes where were then and looking at the world now. Yes, we’ve reissued this piece before, but once you reread, you’ll see it’s still wildly relevant.
I also want to remind my readers: Bernard Connolly will be on with Rick Santelli this Thursday morning on the Santelli Exchange. It takes place between 10-10:30AM CST. Enjoy (and click on link below to read the post)
Now that the FED has provided the U.S. and world financial system with a suit of liquidity, it is trying to figure out how to reduce the amount of material. The word “TAPER” is not my favorite for it fails to define what I believe is the goal of the FOMC. Who cares if the FED reduces it security purchases? That is not the problem. If the economy has any real traction the current balance sheet of more than $3 TRILLION should be quite sufficient to keep interest low. The dilemma is how to remove the LIQUIDITY without causing a collapse in Bernanke’s beloved PORTFOLIO BALANCE CHANNEL.
The much-awaited piece from Jon Hilsenrath about FED “tapering” appeared in the weekend WSJ, and, as promised by the abundant tweets, it delivered very little in providing any new insights into Fed halting of security purchases. The headline, “Fed Maps Exit From Stimulus,” wasn’t a map of any kind and merely seemed to provide the philosopher’s answer to question of what to do when confronted with the fork in the road … TAKE IT. The FED is caught on the horns of a dilemma for it wants to provide some clarity as to how it will end the large-scale asset purchases (LSAP) without sending the market into a downside tailspin. The massive increase in the FED‘s balance sheet has provided the rocket fuel to boost the demand for all types of risky assets but how do they know the economy has enough strength to sustain the rally on its own. It seems that the most important voice now will be Fed Governor Jeremy Stein–more important than Jon Hilsenrath–for he seemed to unnerve Chairman Bernanke with his April 19 speech in which he warned about the distorting impact the Fed was having on risk assets. It seems the Chairman has awoken to the idea that the FED has blown an asset bubble, especially now that the Japanese have added to global liquidity.
There was a Reuters story yesterday by William Schomberg, “G7 Finance Chiefs to Discuss Bank Reform Push.” Very few people picked up on this but it seems strange that all the sudden a meeting is called to discuss what elements of bank reform. Are they going to try to persuade Germany to get behind the EU push for a banking union and if so why the hurry before the September German elections? The idea of a banking union with resolution authority is sure to be a lightening rod for all the German angst about the bailouts of the peripheral nations. The Reuters piece notes that some G-7 officials are upset that the U.K. called the meeting so soon after the recent IMF talks in Washington. One official said, “I am really annoyed I’ve got to give up my weekend for this.”
First, the RBA finally cut the lending rate by 25 basis points to 2.75%. By the close of the market, the Aussie dollar remained weak as some were surprised by the move. As I promised my readers of NOTES it is the 2/10 yield curve where the indicator of further currency and bank action will be found. The 2/10 steepened a slight three points, but the action ahead will be the key. Failure to take out recent steepener highs will be an indicator that the RBA has more work to do if it wishes to give a boost to the Australian economy.
First, the unemployment report offered no surprises as the market was close to the actual release. The real surprise was in the upward revisions to the February and March numbers. The negative surprise was the average work week shrinking by 0.2% of an hour. The shorter work week may be an aberration but it may mean that employers are cutting workers hours so as to keep under the Affordable Care Act mandates, but I caution it is far too early to say that this is definitely occurring. The BOND markets reacted negatively to the “stronger” jobs data and the 10-year note future fell as yields rose by 10 basis points. Investors bought stocks and seemingly sold bonds in a performance of risk-on/risk-off. Again, one day’s action does not a trend make. The pure risk-on/risk-off paradigm has been dormant for quite a while and let’s hope it stays that way.
The last two days has seen two of the world’s key central banks deliver fresh interest rate decisions and there was very little in way of surprises. In a salute to the philosopher Isiah Berlin, I have noted that Chairman Bernanke is a HEDGEHOG and President Draghi a FOX. A hedgehog is one who “views the world through a single defining idea.” The economy is slowing, unemployment is high, inflation is low, so it is appropriate for the FED to buy and continue buying Treasury debt. You say it is not having the desired effect? Buy more. In yesterday’s FOMC statement, the FED noted that ”… FISCAL POLICY IS RESTRAINING ECONOMIC GROWTH.” The meaning of this is that Washington is acting irresponsibly, thus the FED needs to possibly INCREASE its bond and mortgage-backed securities purchases. Whatever it is, QE IS THE ANSWER.
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?