The interest rate variable is alive, well and affecting global markets. Mario Draghi has played the “WIZARD OF FRANKFURT” as he has sought to forestall a financial implosion of Europe. Draghi’s comments in London on July 26, in that the ECB would stem the crisis at end with the tools at its disposal, markets had to believe that ECB policy would be “SUFFICIENT.” As we all know by now, President Draghi has been successful as the Spanish and Italian yield curves have steepened and the 2-YEAR NOTES have seen its yields dramatically drop–the Spanish went from 7% to 3.73%.
Draghi’s effort has been successful in curbing the immediate crisis and global assets have all been able to rally in the becalmed environment. The moves by Draghi, while having a major impact, have caused political strife among the members of the EU. In a Der Spiegel article, it is noted that at the ECB press conference of last Thursday: “The central bank chief mentioned various ‘options’ that could be extensively reviewed by commissions and possibly implemented at some point … ‘could’ being the operative word, rather than ‘must’.”
As the article goes on to explain, Draghi’s London speech was representative of policy making on the run. In rushing to calm the markets, Draghi had not consulted with many members of the ECB Board. The crisis in Europe was aboil as the short term debt instruments were under heavy selling pressure and Spanish 2-YEAR NOTES were yielding 7%. There is nothing magical about 7% except for it reflected the lack of buying in the post-LTRO financial realm.
If the YIELD CURVE HAD CONTINUED TO FLATTEN BECAUSE OF NO BUYERS, THEN THE ECB AND ECOFIN WOULD HAVE BEEN IN A “CODE BLUE.” As the Der Spiegel article (HOW THE ECB PLANS TO USE ITS BAZOOKA) details:
“The only problem was that the step was precipitous and poorly prepared. The ECB president had left large parts of the central bank leadership in the dark about his foray. In addition, he initially had no idea what the new bond buying program would actually look like.Draghi had only vaguely discussed his ideas with a few of his fellow executive board members. The governors of the national central banks, such as Bundesbank President Weidmann, only learned of the plan through news agencies. And no one was notified in advance in the European capitals,either.”
This seems to reveal why the German financial elite have been very aggressive in their push back. Draghi pulled an Alexander Haig and declared that he was in charge and the financial press wants so much for a crisis resolution that they were driving the get away armored car. President Draghi thought he was back at Goldman and relishing playing with OPM (other people’s money). However, the GOOD BAVARIAN BURGHERS WERE NOT SO COMPLACENT.
***Quick Hitter: Tonight the BOJ meets to announce its policy intentions … NO CHANGE. The overnight rate is 10 basis points and there is where it will stay. There are two new voting members who are having their first meeting. The consensus view is that these two are far more political than the previous BOJ members and are more apt to represent the views of the Ministry of Finance. First meeting will probably not be the one to find the voice of dissent. Again, NO CHANGE.
***In a Financial Times article from August 3, “Rousseff Outlines Contract With Brazil Industry,” Brazilian President DIMLA lets it be known that the government views the social contract between itself and national industry as sacrosanct. In a speech in London she warned Brazilian carmakers not to lay off workers if they wanted tax breaks to help them through tough economic times. “We are giving incentives to guarantee employment. They need to know that this is our sole motive.”
The Rousseff Government has prodded the Brazilian Central Bank to lower interest rates in an effort to stimulate growth. Since the ROUSSEFF ADMINISTRATION has taken office, the Brazilian REAL has dropped from 1.65 to 2.03 … lower interest rates, a depreciating currency and a national industrial policy.
The BRICS are being tossed at the fragile glass houses of the European periphery. What price does the EURO have to drop to for Spain, Italy, Portugal, et al to be competitive with emerging industrial nations. Europe is causing a global slowdown that is forcing many developing nations to adjust their economic growth plans. The sad fact for the Europeans is that Brazil and others are far more agile in responding to the global financial landscape than the indecisive political body in Brussels. For Mario Draghi, there are going to be a lot more could’ve, would’ve, should’ves.
Tags: BOJ, Brazil, Brazilian real, BRICS, Draghi, ECB, Germany, Italian 2-year notes, LTRO, Spanish 2-year notes, Weidmann
August 8, 2012 at 10:19 pm |
Sounds like Mario Draghi should have conversation with his cohorts on the Trust/Custodial Plan I outlined for them back in early July.
Kevin
August 9, 2012 at 6:34 am |
Kevin–no argument there.But as a professor you know you can’t make those who don’t wish to or already know everything—learn.Remember that the whole basis of the DRAGHI COUP is that markets have mispriced sovereign debt–SCHAUEBLE laid the groundwork for draghi to proceed,for correcting mispriced debt is now the ECB mandate.
August 9, 2012 at 6:43 am |
“It’s Kind of a Draghi” by the Buckinghams
August 9, 2012 at 10:58 am |
Inflation has slowed to 1.8% in China. Is this a bullish or bearish data point? It looks like the majority of people have a bullish interpretation in that the Chinese Central Bank can expand some stimulus to the overall economy. But for some reason I can’t stop scratching my head that weaker inflation in a place such as China is indicative of further slowing which should be interpreted as a bearish data point.
What do you think?
Danny
August 9, 2012 at 11:38 am |
BRICS, Brazil has not found traction as they lose on their commodity driven enviroment. The countless monetary policies the government has swept underneath Brazil’s feet has pulled back on investments as plenty of hot money has left that refinery. The economy was a running riot not but a year and a half ago, now it is struggling with sustaing fiscal stability. I remember speaking to a woman that told me when I was visiting LA I believe, “that it was more cheap to buy a coach purse in the US than in Rio” and it was half price in the US. Their credit bubble has run rampant and industrials which makes up one-third GDP is and has been drifting down the rabbit hole. Do we actually see a rebound as they have two of the biggest global stimlui in the upcoming future with the olympics and World cup? Is this still the beginning of monetary policies to come?
August 9, 2012 at 8:40 pm |
hey raymack—always appreeciate the musical input;i always think about inputing a reference to Putney Swope—-how many syllable’s Mario
August 12, 2012 at 3:24 pm |
danny–based on everything we read i think you are right.But as a long time readwer of NOTES you know I am always skeptical of Chinese data.China because of its huge capital investment will be a drag on the global scene for years to come.Part of the lack of inflation in the Bernanke story is the huge output gap that exists in China and the recent export figures seem to confirm that
August 12, 2012 at 3:29 pm |
Mario–I think the Brazilian situation is very important to watch as it reflects how the developing economies are going to try to deal with any slowdown in the DEVELOPED WORLD.More important then the two events you cite we will need to watch the agricultural sectors of Brazil to see if the high global grain prices bring a huge increase in planting intentions–especially with a “weak” REAL.As Brazilian interest rates head lower it will be important to see if Brazilian corporates increase capital investment.It appears that Dimla has a bit of the import substitution ideas in her head—back to the days of Raul Prebisch