It is that time on the calendar when the FOMC gathers to discuss the economic landscape and analyze the output of flawed models to set a course with the a strong sense of absolute certainty of their convictions … at least until the next crisis. Many analysts are spewing the concept of another QE program so as to give the recent improving data some extra lift to insure that the recent growth has legs. It would be a bad decision for many reasons but the top three arguing against any new QE program are:
1. The global equity markets are in rally mode following the LTRO program from the ECB and the continued soft stance of the world’s central banks. Last week, Brazil cut rates by 50 basis points. Today, the Bank of Israel, under the guidance of Stanley Fischer, cut rates to 2.5% as the typically HAWKISH Fischer showed great concern about a developing recession in Europe and its impact on Israeli exports. It is time that the FED hold its powder and let some of the other banks do the work that has fallen on the FED‘s balance sheet. Bernanke would be foolish to waste his energy at this time and wait for further developments from Europe.
2. The YIELD CURVES in the European peripheries have signaled that there is a sense on momentary relief in the credit markets as money is flowing into short-term instruments.I t was reported today that U.S. money market funds were again investing in French and Spanish short-term instruments out to 30 days, another indication that the FED can be cautious and not utilize all its weapons. Remember that the ITALIAN 2/10 curve has moved from an inverted 50 basis points to a positive 258 at today’s close. A move of this magnitude in such a short period of time is a strong indication that the LTRO program is having an impact to at least 3 years out. Irish TWO-YEARS have dropped from double digits to 5.19%, taking the 2/10 from inversion to +200 basis points. Ben, hold fire!
3. The FED chairman will be going to the HILL soon to face the HOUSE and SENATE Committees on Banking and Finance to deliver his semi-annual testimony on the economy and FED POLICY. It will not be a friendly reception as this is an election year and many legislators will be posturing for the home-folk. Mr. Bernanke will be facing the hostility of RON PAUL, Bernie Saunders and other who will be criticizing the FED from all directions. Ron Paul will take BERNANKE to task for the DOLLAR SWAP arrangements with several central banks, a move that FED bashers will label an indiscretion at best and maybe even beyond the FED‘s purview. To face the HILL with any hint of a new QE is just not something Chairman Bernanke is going to want to discuss.
The QE wants to be laid aside especially since the FED issued its WHITE PAPER on HOUSING. There is an effort to start attcking the root of the deleveraging problem rather than fire-housing the entire system. It would behoove everyone to reacquaint themselves with recent FED GOVERNORS’ statements about the housing market.
***RUMOR FROM DAVOS TONIGHT: THE PLACEMATS AT TONIGHTS PARTY WERE COPIES OF PRESIDENT OBAMA’S STATE OF THE UNION ADDRESS. At this time we have no verification but await further news from the ONION.
Tags: Bank of Israel, Bernanke, Davos, dollar swap, Europe, FOMC, Hill, LTRO, QE, Ron Paul, State of the Union
January 25, 2012 at 9:21 pm |
Well, we all definitely heard it here first…Fed projections driving volume and vol in long end of ED curve. Interesting watching green and even blues trading 20 bps higher straight away. Assuming LIBOR-OIS ~40bps, and OIS-Fed funds target of ~10, Dec 15 pricing at 1.35% still seems a bit cheap as some have noted (especially considering the positive carry). But that’s a LONG time to be making an economic projection and a tremendous amount of uncertainty in my view. I wonder if the market is pricing this one appropriately now. Looking forward to hearing your thoughts after today.
January 26, 2012 at 5:12 pm |
MattW–no way to price it so let’s just trade and take advantage of the opportunities that the academics with no respect for markets are going to provide us.The FED’s stance has jsut opened the doors for Mario Draghi to be even more aggressive in the next round of LTRO—will blog about this and of course Bernanke has taken a trip back to 1937 and proven that he will not make those errors–he is the ultimate 37er