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.
Archive for the ‘ECB’ Category
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?
Today we got follow-through in the global equity markets as the EUR/YEN cross rallied to three-year highs since the YEN was, again, the chief recipient of the Bank of Japan’s (BOJ) enhanced efforts to bring forth inflation from a long time deflation-plagued economy. The Japanese investors were busy sending forth YEN in search of yield but also buying NIKKEI stocks in a return for domestic yield. A positive outcome from the sudden desire of Japanese investors into equities may mean an increase in corporate democracy as the demand for dividends is going to increase. The corporate culture in Japan has always been anti-shareholder as the predominant thought is that management owns corporations and the shareholders should be quiet and not make waves. The status quo has been challenged by some foreign activist investors and always rebuffed in a very anti-democratic show of defiance. As the desire for an income stream for investors, look for the ABE government to be supportive of increased democratization of corporate Japan. The flow of corporate money to investors would aid domestic demand, especially as bond returns go negative.
Click on image to watch CNBC’s Rick Santelli and Yra discuss the BOJ (and if you’d like Billy Joel’s “We Didn’t Start the Fire” stuck in your head.
Yes, the U.S. and Canadian unemployment data were well below market expectations. Nonfarm payrolls in the U.S. were half of the consensus number and under the 110,000 NFP that we wanted to see so as to test the resolve of the recent equity market rally. Not only were the jobs created numbers weak–manufacturing actually lost jobs–but the important average hourly earnings were flat (0.2% increase expected) so there is no growth in consumer spending potential. As poor as the data release was, by day’s end the SPOO and DOW rallied well off the lows made early in the day. The impact from poor economic fundamentals was not strong enough to overcome the continued release of central bank liquidity into the global economy.
The central banks were in play today and while the Bank of England held to its present course, the Bank of Japan declared that they were now in full battle gear and announced a very aggressive monetary policy agenda. I was surprised by the tenacity of the announced program and certainly by its timing. The recent movements in the YEN, and,especially the EUR/YEN crossrate meant that the BOJ and the Japanese Finance Ministry had some breathing space to allow some of the ill effects of the Cypriot crisis to calm. No such by the BOJ as they “damned the torpedoes and announced full speed ahead.” If other central banks wish to muddle about that is their business but the Japanese are determined to end the deflation that has plagued their economy. The steps that the BOJ announced, which had the greatest impact on the YEN and the Nikkei were:
The initial check with no move on interest rates was offered by the Reserve Bank of Australia as it held its overnight lending rate steady at Tuesday’s meeting. The Aussie 2/10 curve flattened a bit after the meeting and the Aussie two-year note continues to trade at a lower interest rate than the official overnight rate of 3%, yielding just 2.88%. Many readers have asked about the impact of yield curves on equity prices and I will deal with this on an ongoing basis. For an immediate example, if the Aussie curve continues to stay flat I will venture to say that over the course of the year the Australian stock market will underperform. That doesn’t mean that it won’t have synchronized rallies with other developed markets, just by year’s end it will underperform other equity markets. If the RBA acts to cut rates and reset the curve on a more positive slope, the outcome, of course, should be of a better equity performance. To paraphrase Max Planck: Good trading and analysis advances one funeral at a time.
I make a distinct reference to the CASH HIGH S&Ps versus the S&P FUTURES has made an all-time high. According to the CQG charts, the all-time high in the S&P futures front month is 1586.75 and the high daily close is 1576.25. The CASH high is 1576.09 and the previous high CASH daily close was 1565.15, which was surpassed on Friday’s close. Here is a significant chart that shows the important difference between Friday’s close and the last record high close of October 9, 2007.