Tonight is a brief set of bullet points as I have been sidelined with a sinus infection from the high pollen counts. But the world continues to spin (as does my pillow). The Greek situation continues on with the same cast of characters shouting at each other about prior promises made and the need to adhere to the previous economic and political efforts for Greek solvency. We are getting close to the end because Prime Minister Tsipras launched his final salvo with the Brussels Brigade. It is what NOTES FROM UNDERGROUND offered up as the third rail of European politics: SYRIZA WILL CALL A REFERENDUM ON ANY DEAL STRUCK WITH THE TROIKA.
Today, Mr. Tsipras warned, “If the solution offered goes beyond our mandate, it will have to be endorsed by the people.” The Greek PM knows that Brussels fears a referendum more than providing the Greek government with more short-term funding. Syriza needs to appear strong in face of the severe demands being placed upon the Greek populace in what the Prime Minister has called, “a vicious circle of austerity.” It is a smart move because it shifts the burden directly from the Syriza coalition back to the people and it also raises the fear that the demand for referenda on the entire EURO project will spread across all of Europe. The recent mellowing of Germany’s stance by Chancellor Merkel may have much to do with the fear of a referendum.
***Tomorrow’s FOMC meeting … The FED will keep its statement in line with March’s as the economy is tepid and the DOLLAR remains strong. The EURO and YEN remain close to the levels of the March 17-18 meeting while the commodity currencies–Aussie, Loonie and Kiwi–have all rallied against the U.S. dollar. Oil prices have moved higher but not enough to upset the Fed’s inflation forecasts. A new problem for Chair Yellen may be the riots in Baltimore. What initially prompted the civil unrest was a miscarriage of justice by police action, but the rioting is now morphing into a fear of a long, hot summer for urban America because of the economic injustice of low wages. Janet Yellen is on the record as being very concerned about the impact of two decades of stagnant wages on the lower strata of the U.S. economy.
Will the heat from the fires of Baltimore be enough to keep the FED on hold for far longer than markets think probable? If the markets begin to think that the riots will keep the Fed on hold look for the YIELD CURVES to steepen. As I have written for the last two years, a central bank fitting monetary policy to socioeconomic policy is a central bank threatening its credibility. Just something to keep in mind as the Fed struggles with its dual mandate.
***Tomorrow the RBNZ and the BOJ release their monetary policy decisions as well. The RBNZ should lower the overnight rate by 25 basis points because Governor Wheeler continues to voice concerns about the too strong KIWI but he will probably leave the rate unchanged and then try to JAWBONE the currency lower. Later on Wednesday night the BOJ will announce its monetary decision. Some analysts are looking for Governor Kuroda to announce an increase in QE but I don’t believe this will occur for the following reason. Prime Minister ABE is in Washington and is making a historic address to a joint session of Congress.
There will be discussion about the Trans Pacific Partnership, the major Asian trade agreement that is being worked out between the U.S. and 11 other nations. Some members of Congress want a stipulation about currency manipulation written into any new trade agreement as auto manufacturers are perturbed over the recent weakness in the YEN. It would be an embarrassment for ABE if the BOJ increased its QE program with a renewed weakening of the YEN as a result, so the BOJ will announce no change in policy.