Notes From Underground

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.

***Tonight the Bank of Japan will announce its newest efforts at “inflation creation” as rates are expected to be kept at 0.10%. The bigger issue will be whether the BOJ will move to enhance its quantitative easing program. I think the present policy will remain as the BOJ Governor Kuroda will wait to see some of the European issues become clearer before embarking upon further stimulus measures. Last week, Ben Bernanke gave a speech in London that did/will provide cover for added Japanese stimulus measures: “In sharp contrast to tariff wars, monetary reflation in the 1930s was a positive-sum exercise, whose benefits from higher domestic demand in all countries, not from trade diversion arising from changes in exchange rates.” Further, Chairman Bernanke added, “Moreover, even if the expansionary policies of the advanced economies were to lead to significant currency appreciation in emerging markets, the resulting drag on their competitiveness would have to be balanced against the positive effects of stronger advanced-economy demand.” The Bernanke opinion gives the BOJ and Kuroda cover to be aggressive in creating monetary stimulus and let the world be damned. But I believe that Kuroda will wait for some calm in Europe.

***In the morning the BOE will announce at 6:00 a.m. CST and consensus expects steady as it goes. The rate will remain at 0.50% and the present QE program will remain at 375 billion pounds of asset purchases. Again, Governor Mervyn King is a lame duck and leaving office June 30, thus no need to rock the boat. Also, Governor King was in the minority voters at the last two meetings–he wanted to raise the ASSET PURCHASES to 425 billion but was rejected by the committee voting 6-3 against the change.

The European Central Bank will announce at 6:45 a.m. and it is expected to be no change, with rates remaining at 0.75%. At the last meeting there was talk of lowering rates  but unlike with the Fed, we don’t know how many dissenters there were against the status quo. The Euribor is again priced well below the overnight rate as the June Euribor futures contract is priced at 0.99775 with an effective yield of 23 basis points. This reflects a restored calm in the EU banks so if the ECB actually cut rates I would argue that it is well priced in … unless the ECB also moved to take the rate on bank reserves to a negative yield (very unlikely).

At 7:30 a.m. ECB President Draghi will have his usual press conference. Mr. Draghi will be under intense questioning about the role of the ECB in the Cypriot debacle, but he will say that the BAIL IN was a political issue settled by the ECOFIN and Brussels and until there is a community wide banking resolution the ECB has no authority and will have to stick to its mandate of PRICE STABILITY. The press conference will be confrontational on other issues of growth and unemployment so expect a very volatile hour.

Tags: asset purchases, Ben Bernanke, BOE, BOJ, ECB, euribor futures, Fed, Kuroda, Mario Draghi, Mervyn King, QE, Reserve Bank of Australia

This entry was posted on April 3, 2013 at 7:16 pm and is filed under BOE, BoJ, ECB, Fed, RBA. 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.