In the global financial system, the central banks are indeed the are system’s beasts of burden. With the November FED FUNDS contract pricing in 93% chance of a rate cut, Federal Reserve Chairman Jerome Powell will attach himself to the plow and till the soil, spreading more fertilizer for equity purchases and further financial repression of creditors. As we discussed Monday, the week is filled with central bank meetings of importance and further impacted by unemployment and GDP data. But there is so much more in the political realm that we haven’t even entertained:
- Rosneft tells energy buyers they will only take EUROS, not DOLLARS, as the Russians attempt to move away from the U.S. Treasury’s hold on the international system of money transfers. The more the Trump White House uses sanctions the more nations are pressured to search for alternatives so as not to be held hostage to U.S. demands on policy outcomes.
- Sweden Riksbank insists that they will end NEGATIVE INTEREST policy by the end of the year because they sense it has lost its impact and may be a drag of the economy.
- Salvini’s League wins in the UMBRIA regional election, which sends an ominous message to the Democratic Party and Five Star coalition that suggests future political instability in Italy.
- Chancellor Merkel’s CDU Party finishes third in Thuringia as the Communist Linke Party and the right-wing AfD both gain in popularity at the expense of the status quo governing coalition. Will this create a more intense push for FISCAL STIMULUS in Germany in an effort to improve economic performance as the global trade system is struggling during the U.S./China trade rift?
- The Middle East is under strains of mounting uncertainty as Lebanon, Iraq, Turkey and Syria continue to look for an escape from the violence that has plagued the region. Iran is challenging the status quo in the Gulf while Israel has yet to form a government.
- Latin America is experiencing political stress as Argentina turns back to the Peronists and the political/economic success story of Chile is suffering widespread political demonstrations. It appears there is a new Hong Kong flu infecting the global political system.
- Britain has now voted to dissolve Parliament and hold elections on December 12. Regardless of what the polls reflect, Brexit revealed that elections have uncertain outcomes, which will result in unintended economic collateral damage. Imagine if the Corbyn Labour Party actually prevailed?
But the concern is with Powell cutting 25 basis and bearing the burden of the markets’ endless desire for more cheap stimulus to help fuel the massive amounts of financial engineering. For those who want to short VOLATILITY the HOLIDAY markets are upon is while the RISK CALENDAR is full. Enter the short vol dungeon with eyes wide open.
***On Tuesday, Reserve Bank of Australia Governor Philip Lowe delivered a speech on central bank monetary policy. It is a must-read because of its ability to clarify the state of the central banking world. I offer this quote from his speech in an effort to stress yet again that central banks do take foreign exchange rates into their decision making, which as always been stated in the RBA statements: “We can’t ignore these global trends in savings and investment and the responses of other central banks. If we did seek to ignore these trends, the exchange rate would most likely appreciate. In the current environment, this would be unhelpful for both jobs growth and for achieving the inflation target.”
When Draghi and others maintain they don’t TARGET exchange rates it is equivalent to President Clinton stating he didn’t have sex with that woman. What does targeting mean?
Lastly, I’m including a link to the October 25 FRA podcast I recorded with David Rosenberg. Enjoy.
Tags: Argentina, CDU, Chile, Federal Reserve, fiscal stimulus, Germany, latin America, negative interest rates, rate cut, RBA, riksbank, Rosneft, U.S. Dollar
October 29, 2019 at 6:23 pm |
Thanks, YRA, – question re BOC tonight, with the 2 10 starting ti steepen, albeit from historically low levels, is the CAD currency vulnerable… noticed also RBC has a very week signal, with two outside weeks to the downside
October 29, 2019 at 6:37 pm |
They may not target the exchange rate, but whatever it is they are targeting can impact the exchange rate.
Can you really extinguish debt with a debt instrument? They’re fighting fire with fire from my perspective. It will be interesting to see if Sweden’s Riksbank can pull this off.
Yra, I have gained so much insight into the world of finance from you and your readers. Keep the comments coming!
October 30, 2019 at 9:14 am |
With regard to central banks and volatility- perhaps Nixon’s aphorism should be updated to: “we are all stabilizers now”.
October 30, 2019 at 1:41 pm |
KJM–nice to see we are in total agreement –it’s Halloween shouldn’t you be in Invasion of the Body Snatchers?
October 30, 2019 at 10:04 am |
Hello Yra
No big thoughts here. Like you and everybody else, simply waiting on Jerome.
Nothing else much matters than what he does and what he says afterwards.
Nice way to run the markets, but that’s been reality for the better part of a decade now.
October 30, 2019 at 11:29 am |
Temple–amen brother .Santelli’s interview with Vince Reinhart confirmed these thoughts—Vince,pulling no punches and he was NYFRB chief economist in previous existence