Notes From Underground

Tomorrow the BOE and ECB will release their interest rate intentions. The Bank of England is expected to keep the funding rate at 0.50% while moving to increase the ASSET PURCHASING FACILITY (QE BY ANY OTHER NAME) by another 50 BILLION POUNDS to a level of 325 BILLION STERLING. The recent speeches from the Monetary Policy Committee have had a DOVISH bias, prompting the consensus view for an increase in the QE program.

It was earlier in the week that the CONSENSUS OF TWO-ARMED ECONOMISTS WAS FOR THE RESERVE BANK OF AUSTRALIA TO CUT RATES BY 25 basis points and we are well aware of how accurate that call proved out. It would be foolish for Mervyn King to move the BOE at this juncture. He may as well wait for the results of the ECB‘s 3-YEAR LTRO program on February 29.

If the Bank holds steady, the British pound should out perform on the crosses and hold its recent gains against the DOLLAR. The EUR/GBP cross is basically in the middle of its recent range so the market has shown very little bias. It will be interesting to hear the comments from Mr. King in reference to the problems in Europe.

Following the BOE‘s announcement, the ECB will reveal its lending rate. With all the Greek turmoil and the upcoming LTRO, Mario Draghi is expected to maintain the overnight rate at 1%. If the ECB were to cut it would probably be in response to the recent rally in the EURO, but a CUT IS A VERY LOW PROBABILITY AT THIS TIME. The LTRO program is having its intended effect and with round two on the horizon there isn’t a need to cut and upset the Germans.

ECB President Draghi has been placed in a very difficult position as he attempts to balance the austerity desires of the Germans with the need for relief that  is demanded by the European credit-stressed banks. Up to this point Mr. Draghi has proven pragmatic in his approach and is winning the support of the markets.

 The GREEK DRAMA will continue to play out but President Draghi seems to want to utilize the threat of default to ALLOW THE ECB TO BE AS AGGRESSIVE AS POSSIBLE ON THE LTRO. The YIELD CURVES IN THE EUROPEAN MARKETS ARE HOLDING THE RECENT BULL STEEPENERS AS THE PRESSURE HAS BEEN RELIEVED ON THE SHORT END OF THE CURVE. The problem is Portugal as its curve has inverted and is at -280 basis points. The Irish 2/10 is holding at a healthy +252. Mario Draghi, paging Mario Draghi to the cashier window.

***TONIGHT’S NEWS FOR THE MARKET TO DIGEST IS THE CPI DATA OUT OF CHINA. Readers of NFU know that I give little credibility to any data out of China for I cannot trust a nation that blocks the free flow of information over the Internet. Every news outlet though will be discussing that China’s CPI rose 4.5%–the market was looking for 4.0%. It seems that FOOD prices were up 10%, driving consumer prices higher, but otherwise the “OFFICIAL DATA”  was somewhat tepid with non-food up just 1.8%.

The importance of this is that the Chinese can relieve some of the food price pressure by increasing imports to offset whatever domestic shortfalls are causing the higher food costs. The South American harvest is underway so there will be increased supply for the Chinese to purchase. THE BENEFITS OF A STRONGER YUAN ARE THE COST OF DOLLAR-BASED RESOURCES BECOME CHEAPER. LET’S SEE IF U.S. AGRICULTURAL PRICES MOVE HIGHER IN ANTICIPATION OF INCREASED CHINESE IMPORTS.

IF I WAS HU JINTAO, I WOULD BE LOADING UP THE EMPTY FREIGHTERS AT VERY LOW RATES WITH ALL THE GRAIN AND OTHER PRODUCTS I COULD PROCURE. THE ADDED BENEFIT IS THAT IT WOULD RELIEVE THE POLITICAL PRESSURE FROM THE U.S. CONGRESS AND THE BRAZILIANS ABOUT ITS TRADE SURPLUS. No, that makes too much sense.

Tags: BOE, China, CPI, Dollar, ECB, EUR/GBP, Hu Jintao, LTRO, Mario Draghi, Mervyn King, QE

This entry was posted on February 8, 2012 at 10:24 pm and is filed under BOE, China, Debt Market, ECB. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.