In a September 11 post, I criticized the Japanese Central Banks’s policy for its technical approach to attempt to steepen its 2/10 yield. I wrote the following:
Archive for the ‘BoJ’ Category
This is a tough POST to write for I will criticize a newspaper I have read every day for at least 30 years. (In fact, I still have it delivered on my doorstep and read most of it online in the evening before the hard copy arrives.) The London Financial Times had a front page story, “Troubled Italian Banks Face Fresh Risk of Failing If Renzi Loses Vote.” This is a deplorable headline for it harkens back to the days of the mainstream media warning of dire consequences if Brexit passed and the Trump was elected president. THIS IS SCARE MONGERING. It raises the question: When will the Davos crowd EVER LEARN?
On Wednesday, the FOMC left its interest rate policy in tact as it awaits more data before deciding to change interest rates. The FOMC statement wanted to reflect some underlying hawkishness but the market is reticent to accept the veracity of Fed releases. The DOLLAR initially rallied as the algo deemed the “hawkish” language a positive for the dollar and bearish for the precious metals but upon a very quick review the market reversed and now demands that the Fed reveal its Missouri lineage and “SHOW ME.” The yield curve gave the FED some credence by flattening in response to a change in some of the rhetoric, “near-term risks to the economic outlook have diminished.” This provides the FED the flexibility to respond to self-diagnosed headwinds in an effort to keep rates at present levels for as long as the DOVE can fly. The FED is pinned not by U.S. data but by the actions of the ECB and the BOJ.
As I ponder things in the 118 degree heat, it is time for some reflection and perspective:
a. The Bank of England performed beautifully today and took a breath before cutting rates further and/or increasing the BOE’s balance sheet. Now that Prime Minister MAY‘s cabinet is devoid of the idiot George Osborne, it behooved BOE Governor Carney to wait and see if fiscal policy would be the stimulative tool of choice and preserve the monetary policy for future use. I had advised my employers that Carney would be reticent to act because he is a cautious man and his recent plunge into the political realm in cahoots with George Osborne had sullied his reputation. It seems that Carney wants to remove himself from center stage and allow the new cabinet to have a say in just how to provide any stimulus in response to the dire forecasts from the BREXIT outcome.
Today the Fed delivered as expected, leaving rates unchanged and the market conjecturing about the sincerity of the FED’s data dependency (again). Some analysts and algo readers initially thought the FOMC statement was “hawkish” because the FED removed most of the rhetoric about the headwinds of international global and financial developments. I say most because the Fed left in “net exports have been soft.” This is either a concern about the lack of global growth and/or an overly strong U.S. dollar. It is MY OPINION that the Fed removed the language about international financial risks as an offering to the HAWKS as a way to get consensus.
Wednesday brings the results of the FOMC meeting and the official policy statement laying out Fed insights into the domestic and of recent concern the fragile state of the global economy. There will be no press conference so the “kremlinologists” of fedspeak will be busy parsing every nuanced word. I WILL BE WATCHING WHAT OUTFIT THE FED CHAIR IS WEARING. IF SHE IS WEARING A NEHRU JACKET I WILL ASSUME THE FED IS MORE CONCERNED ABOUT THE EFFECT OF GLOBAL MARKETS KEEPING DOWNWARD PRESSURE ON AMERICAN WAGES. Domestic-oriented analysts focus on the U.S. unemployment rate of 5.0% as the key factor for the need for the FED to raise rates. The flawed models of the FED fail to take into account the pressures on the U.S. economy from capital and labor situations worldwide.
On Monday, the yield curves tried to confuse us and the result was that the 2/10 provided the impetus for flattening across the board. The yield differentials are rangebound, creating a grind trade as the market looks for some clarification for longer term direction. The Wisconsin Primary will probably add more confusion to the Republican Presidential race. The situation in Europe is confused as the refugee issue has now become a negotiating chip for debt relief and Mario Draghi prays every night for an economic slowdown in Germany so as to get some support for some fiscal stimulus. ECB Chief Economist Peter Praet is quoted in a story from MNI Group, saying, “The need for a superior policy mix is no excuse for central banks to be passive when their mandates are under threat. The ECB has demonstrated through its actions that it does not wait for others to move first.”
There is so much in the political realm that proves the concept of 2+2=5. I will continue the analysis of the impact of politics on markets but remember there is so much political tinder that can ignite the fires of market volatility. A quick sample from over the weekend can be found in Europe where local elections in Frankfurt, the home of the ECB, resulted in large gains for the AfD right-wing party. More dramatically, a small Neo-Nazi party won 17 percent in one district. Support for Merkel’s party, the CDU, and her coalition partner SPD, dwindled. This weekend’s regional elections in three German states will probably result in more losses for the Merkel government. Again, as bad as the refugee problem is in Germany it seems that the monetary policies of the authoritarian ECB and President Draghi are causing greater angst among the German population. Negative interest rates in Germany continue to repress German savers, resulting in a loss of confidence in the established political elite.
The markets are in turmoil and it gets the mind to thinking: What could possibly have caused today’s reversal in the stock market and the long end of the BOND MARKET? The market seemed like it was on the edge of a complete risk capitulation. The dollar was dropping, bonds all over the world were in rally mode and the precious metals were finally finding some technical strength as the GOLD (in pure dollar terms) had finally rallied through its 200-day moving average. Even the SILVER was able to synchronize with the GOLD and break out of three months of resistance. (The silver 200-day is at 15.13, still a bit above its closing price.) The global stock markets were cascading lower as the Nikkei and German DAX took out their lows made the night of the BOJ’s surprise move to a three-tiered negative interest rate policy.
First, tomorrow morning Goldman’s Lloyd Blankfein will be rolled out on CNBC to share his wisdom about the state of global markets. Maybe he will remind investors that Goldman and other banks are doing GOD’S WORK. I will write what I wrote recently: Noah and the flood were also GOD’s work so it is important for the world’s banks to signal which part of GOD’s work in which they are involved. The European bank stocks are under stress again. Deutsche Bank and many other EU money center banks continue to make new lows every day. What are investors fleeing from? Probably the huge amount of NON-PERFORMING LOANS that exist on bank balance sheet and will have to be met with NEW CAPITAL to meet the more stringent regulatory requirements from the European oversight authority, as well as increased capital requirements under Basel III. There is a great effort to initiate a FDIC-type of deposit insurance program for all of Europe–a single agency–but the Germans will not allow their CREDIT CARD TO BE USED UNTIL THE PRESENT BALANCE SHEETS OF ALL THE FINANCIALLY STRESSED INSTITUTIONS ARE PURGED OF INSOLVENT, ZOMBIE TYPE LOANS. The lack of any banking guarantee is creating an underlying tension throughout the European financial system and without a robust corporate bond market there is nothing to disintermediate the financial power of the banks. The ECB is vacuuming up all the high quality collateral so finding adequate borrowing instruments to facilitate lending is adding to the drag on the EU economy.