Yesterday, I had a global macro session with some of the best users of the Notes From Underground. They are disciplined in pursuit of profit but as most of my readers try to do, pursue causation as a prelude to correlation. Carl had prepared a white board chart of all of the relevant events that are set to play out in September. April may be the cruelest month but September 2013 will certainly give T.S. Eliot’s poem a run for the grand title. The desire to anticipate any of the events may lead to a “wasteland” of capital. So thanks to Carl, let me restate the list of events:
1. The Reserve Bank of Australia announced that it was holding its overnight interest rate steady although it was still concerned about the overvaluation of the Australian dollar. The RBA will be on hold for a while but we must not forget that September 7 is the Australian elections, which polls have consistently showed that the Labor Party will lose and we will get a change of government;
2. Today, the Bank of Canada announced that it too was holding rates steady at 1 percent, citing the low rate of inflation. And, in paying homage to Bernanke’s OUTPUT GAP, the bank noted the continued amount of SLACK in the economy. No mention was made of the Canadian dollar so the BOC is quite comfortable in allowing the market to take the currency wherever it desires;
3. Tomorrow, the Bank of England and the European Central Bank announce monetary policy decisions. The ECB will not change a thing as the EURO has been steady and peripheral sovereign interest rates continue to hold at recent lower levels. The Bank of England will provide a bigger problem as Governor Mark Carney wishes to keep rates steady and keep the British pound weak even as the economic data continues to improve. Carney is learning that the BOE is not the Bank of Canada, in that as BOC Governor Mark Carney’s views always prevailed, but the BOE Monetary Policy Committee is a far different ruling body. Remember, the previous BOE Governor, Mervyn King, lost three consecutive votes and was overruled on votes of monetary policy. The British pound has rallied against the EURO in defying the overt wishes of the BOE Governor. Let’s see if Carney does anything on the issue of FORWARD GUIDANCE;
4. Friday brings the key data of the month: the U.S. unemployment report. The market is looking for non-farm payrolls of 180,000 and the rate to hold steady at 7.4%. Hourly earnings will be closely watched to see if wages are increasing to aid the consumer. The number is of unusual importance because of the September 18 FOMC meeting where the FED is expected to announce its decision on TAPERING the amount of debt it will continue to purchase. If the nonfarm payrolls number is under a 100,000, then the market will sense that the FED will not taper and keep purchases at its current rate of $85 billion a month. If the number is more than 200,000, the bonds will sell off in the anticipation that the FED will cut the purchases by the highest of the anticipated levels, approximately $20 billion a month. Friday will also bring a barrage of headlines coming from the G-20 meeting;
5. The G-20 meets in St. Petersburg, Russia this weekend and expect much acrimony between the U.S. and Russia over the Syrian situation. It will be difficult to find consensus in such a highly charged political environment. Russia’s Putin will be an aggressor on the political front while Brazil and other emerging nations will be attacking the U.S. and the FED on its moves to taper and send global interest rates higher. Overall, it will be a very messy affair. The most ideal outcome for the markets would be that the U.S. and Russia come to agreement on Syria in return for the FED to delay its tapering. Dream on.
6. September 17-18 is the FOMC meeting in which we’ll get an answer to the question taper or not to taper (and, of course, by how much). Much will depend on Friday’s unemployment data;
7. September 22 is the German Elections. Currently, the polls have Chancellor Merkel with a commanding lead over Peer Steinbruck but for me the issue is whether the FDP holds above the 5% threshold and stays in Parliament. If the FDP falls under 5% and Merkel fails to receive an outright majority then there will have to be a coalition with the SPD. A more important issue will be if the Alternative for Germany (AfD) party achieves the 5% threshold and receives seats in Parliament. The AfD is opposed to the German backstopping the entire Euro debt agreements, which it views as a transfer of German wealth to the rest of Europe. The AfD continues to poll at 3%, but if there is any anti-Euro sentiment from the Bavarian Burghers it will show itself in votes for the AfD.
8. The announcement of a new Fed Chairman may also take place in September. I have not weighed in on the Summers/Yellen debate but as I ponder the issue there seems to be an important element as to why some analysts are promoting Larry Summers. Fed Governor Daniel Tarullo has joined with members in the U.S. Senate in pushing for greater regulation for the mega-money-centered banks (also known as TOO BIG TO FAIL BANKS). This issue of macro-prudential regulation is being promoted as a way to curtail the ability of the New York-based banks to leverage their balance sheets, or business as usual. My SPIN on this is that Wall Street is making a push for Larry Summers because they are fearful of the efforts of Senators Sherrod Brown, Elizabeth Warren and David Vetters in their efforts to legislatively regulate the TBTF banks. Wall Street views Larry Summers as a friend because of his close ties to former Treasury Secretary Robert Rubin. If my view is correct, a Yellen appointment may well present a long/short equity trade. Buy the quality regionals and sell the large money-centered banks that depend on high leverage ratios to enhance their earnings.
Again, this September is a potentially cruel month in terms of the global macro trade. In terms of all else, let me wish my Jewish readers a very Happy and Healthy New Year and a period of deep reflection during the time of the awe of the Holy Days. For all my other readers, I wish you health and peace and after that prosperity and look forward to being able to provide useful insights into the global economy. L’Shana Tovah.
Tags: Australian elections, Bank of Canada, Bank of England, Ben Bernanke, British pound, ECB, Euro, Fed, G-20, German elections, Janet Yellen, Larry Summers, Mark Carney, nonfarm payrolls, QE, RBA, Russia, tapering