Notes From Underground: Will Mario Drag His Feet Tomorrow?

Thursday is ECB day as the doves all return to Frankfurt. I will unequivocally say that there will be NO NEW QE ENHANCEMENT. MAYBE PRESIDENT DRAGHI will LOWER THE RESERVE RATE TO NEGATIVE 50 BASIS POINTS but this would only be cosmetic at this point. CURRENTLY, THERE ARE SIX COUNTRIES WHERE EVERYTHING SHORTER THAN TWO YEARS IS OFF LIMITS TO THE ECB’S QE AND TLTRO PROGRAMS BECAUSE THEIR YIELDS ARE LOWER THAN THE NEGATIVE FORTY BASIS POINT THRESHOLD. The ECB is suffering from a lack of assets to purchase so by dropping the reserve deposit rate more sovereign debt is eligible under the ECB guidelines. Again, the political acrimony is Europe is high and with Chancellor Merkel’s popularity in decline Mario Draghi will be reticent to upset German F.M. Schaeuble and Jens Weidmann. Don’t confuse ECB independence with the current political uncertainty in Germany. A drop in the RESERVE DEPOSIT rate will not affect domestic banking levels and if the ECB were to lower rates that would probably follow the Japanese example of having a tiered system so as avoid domestic savers fleeing the banking system.

Schaeuble’s recent ECB criticism confirms the uneasiness in Germany as the good Bavarian Burghers are burdened with financial repression in an effort to bail out the governments and banks of the heavily indebted peripherals and France. In an April 17 Bloomberg News story by Stefan Nicola, Markus Soeder, the Bavarian finance minister and Merkel ally, said the next ECB head should be from Germany. Soeder noted that German savers are being “expropriated” to save southern Europeans from severe debt.

The criticisms of Draghi are very open and the rhetoric is becoming more vitriolic. The economic  argument for QE is past. It is politics taking center stage and Draghi will be über cautious. If the reserve rate is lowered at the 6:45 a.m. CDT announcement, the EURO will weaken but be very careful because as usual the Draghi press conference will be far more important. In accordance with last week’s G-20 and IMF agreements, President Draghi will be careful not to talk the EURO lower for any aggressive rhetoric will certainly illicit a response from the Japanese, who were voted the bad actor of currency intervention. This will be a very cautious Draghi.

***In late trading today the U.S. bond markets came under intense selling pressure along the entire curve. But it was the shorter end that initiated the selloff with the 10s and 30s joining late. There is some thought that the steep rise in commodity prices may be interpreted as the TRANSITORY effects of low crude and raw material prices are over and the FED may be more prone to raising rates. It’s far too early to go down that road but nonetheless yields on U.S. Treasuries rose dramatically. As Rick Santelli pointed out, the widening yield differential between German bunds and U.S. 10-year notes led to a sizable dollar rally. One day’s technical reversal is interesting but does not indicate any trend change as of yet. The GOLD and silver also sold off at the end of the day as the precious metals had to take notice of market driven higher short-term yields.

The equity markets held up well as some “better” earnings from large U.S. corporations were deemed a positive. Be patient and watch for any sort of follow-through on the U.S. interest rate market. The December 2016 eurodollar contract, the key barometer, did close under the April 1 low, which means that the market is taking back Yellen’s recent dovishness. The game is on, especially because of the recent robust rally in metals, grains, energy, equity markets and the softness in the DOLLAR. Draghi will be slow to change but will Yellen walk back any sense of a market-influenced rate rise in the U.S. Be patient and wait for the volatility of the headline algo readers to provide opportunity. As they ask in Putney’s Swope (a favorite movie of mine), HOW MANY SYLLABLES MARIO?

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8 Responses to “Notes From Underground: Will Mario Drag His Feet Tomorrow?”

  1. Ball Says:

    Hi yra,
    Please forgive my ignorance, but did the usd rise so dramatically today wed apr 20, because foreign banks were rushing in to buy usd, therefore driving up demand, and that was bcuz the German bund yield is so low vs the us 10 yr yield, the savers move their money to wherever it gives the best return? But why today Instead of last week? Could it have been in anticipation of the ECB circus on Thursday? And if likely, should we be watching for a rush to the USD exits next week wed when yellen does not raise rates? Or are they likely to stay in usd bcuz it’s the highest interest rate payer in the world today? What is a great online tutorial to understand bond prices vs yields and why yields won’t stay low any longer?

    • yra Says:

      Ball–not sure that central banks were buying Dollars.My thoughts are that the rise in U.S. yields caused a correction in markets totally convinced that yellen’s dovishness would prevail but as the December 2016 eurodollar contract closed under the April 1st low of unemployment data release day,the market was experiencing a rethink and dollars were bought and hence the late sell off in Gold and Silver as yields rose—proved short lived but I believe that analysis is correct.As for an online source for a tutorial I don’t know as my knowledge base is garnered over forty years but maybe someone will post to aid your knowledge

      • Ball Says:

        Thanks. I agree with your analysis that Jane is a labor lover & will keep rates low to ensure wages ( not simply job qty) grow.

        But I don’t understand why us yields are growing, is bond buying demands weakening, which drives down prices, & rates rise to entice buyers? With markets at & near all time highs, it seems a move to safety of bonds would drive bond prices up & yields down.

    • yra Says:

      Ball–there is an interesting piece in this weeks baron’s by Alan Reichstaffen–read it as it generates a great deal of possibilities on the yield curve—page 37 I believe

  2. asherz Says:

    Yellin’s dovishness is imprinted on her forehead. You may get some misleading head fakes but with $20 trillion in national debt, each 1% increase adds $200 billion to the budget in interest rate payments. The equity markets reacting to “positive” earnings are bull hits. They have been talked down and then “beat” by a penny. Total earnings and revenues are down and buybacks are the backbone of the bids. Interventions and manipulation are the rule in markets. Look into Deutsche Bank testimony in the silver markets as the tip of the iceberg and other pending lawsuits e.g.(Scotiabank) as pulling back the curtain.

  3. Chicken Says:

    CAT – The wheels are falling off? Plenty of cross currents out there, mixed signals….

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