On the Santelli Exchange, me and Rick discussed the very weak ISM non-manufacturing and its impact on the FOMC. The surprise weakness sent PRECIOUS METALS soaring, the DOLLAR lower, BONDS AND EUROPEAN SOVEREIGNS HIGHER and EQUITY MARKETS moderately higher. The FED is under the microscope from so many analysts but the surprise of the day was the OP-ED piece by Professor Larry Summers in the Washington Post. Summers put an academic gloss on the erudite review of Jackson Hole but this sentiment is key: “My second reason for disappointment in Jackson Hole was that Fed Chair Janet Yellen, while very thoughtful and analytic, was too complacent to conclude that even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively. THIS STATEMENT MAY RANK WITH FORMER FED CHAIRMAN BEN BERNANKE’S UNFORTUNATE OBSERVATION THAT SUBPRIME PROBLEMS WOULD BE EASILY CONTAINED,” [emphasis mine]. This is a harsh assessment from a fellow academic, but more importantly it is a stinging criticism of the FED’s forecasting history.
***Tomorrow the Bank of Canada releases its interest decision and consensus is for UNCHANGED at 0.5%. The BOC has never imbibed from the well of QE so nothing to change in that regard. The Canadian government has embarked on a fiscal stimulus program so the BOC will be reticent to change monetary policy.
***The European Central Bank meets on Thursday with a Draghi press conference to follow at 7:30 a.m. CST. The Financial Times’ front page headline, titled, Bond Scarcity Fears As ECB Passes One Trillion Euros of Purchases,” poses problems for Draghi. As I have documented during the last 12 months, the ECB would eventually find itself looking for assets in all the wrong places according to its regulations. Draghi needs to find assets to buy but is presently restricted by its legally imposed capital key, which keeps the ECB purchases to each countries’ contributions to ECB capital.
This is a problem that Draghi will try to evade by either extending the QE program or CHANGING THE MAKE-UP of the asset purchases. If the ECB embarks on a BOJ or SNB program look for Draghi to announce the ECB buying large-cap European stocks or sub-standard corporate bonds. The ECB has already been criticized for buying the private bond offerings of two large European energy concerns. The capital key will be tough to circumvent as the Bundesbank President Jens Weidmann will be vigilant in protecting against the ECB as a conduit of fiscal policy through circumventing the capital key regulations. I will discuss this further tomorrow night.