This week brings Prime Minister Abe’s fiscal plan, the Reserve Bank of Australia’s rate decision, the Bank of England’s monetary results and U.S. nonfarm payrolls on Friday. So let’s put some perspective to tonight’s main events. The RBA will announce its overnight interest rate and consensus is calling for a 25 basis point CUT to 1.5%. Analysts believe that the weakness in the natural resource sector is aiding the reduction in capital expenditure. Also, Aussie inflation is at the bottom of the RBA‘s target range, which provides rationale for the RBA. I am not so sure of a CUT for this is coming at the end of Governor Stevens’s term at the RBA. Dr. Phillip Lowe will take over September 16 so this is the penultimate meeting for Mr. Stevens.
Archive for the ‘RBA’ Category
Yesterday, it was the issue of imbalances and the need for currency manipulation as seen through the eyes of a hegemon in decline. Today there was more criticism of German intransigence as Mario Draghi was pushing back against criticisms from Wolfgang Schaeuble that ECB policy was igniting the fire of the radical right. President Draghi said the ECB was correct in its policies, and current and trade surplus nations were at fault for the continued economic malaise for not embarking on large fiscal stimulus programs. Mario Draghi is lashing out against the German passion for fiscal austerity and labor restructuring, but the ECB President seems to forget the golden rule: He who has the gold makes the rules. I ASK MY READERS TO PONDER THE QUESTION (AGAIN): Who guarantees the balance sheet of the European Central Bank?
Last week, in the middle of gorging our material senses, Janet Yellen was responding to a letter from Ralph Nader, a well known consumer advocate who took the Bernanke and Yellen to task for keeping interest rates too low, resulting in asset inflation for Wall Street and the very wealthy while MAIN STREET was “rewarded” with zero interest rates and almost NO returns on passive, low-risk credit channels. Yellen repeated her third grade teacher tutorial about how savers have indirectly have benefited because of the bounty of jobs available for them and their children and grandchildren and they should stop complaining because home prices have increased to pre-crisis levels in many parts of the country–all because of the wonderful work of the FED and its QE programs. (Even as Carmen Reinhart and other top-level economists have criticized the FED for prolonging FINANCIAL REPRESSION in order to insure against inflation staying below the FED‘s self-imposed mandate of 2 percent.)
The outcome of the Greek referendum surprised all, even those who believed a NO vote was imminent. As NOTES has written ad nauseam, the referendum card was the nuclear option for Prime Minister Tsipras and he played it for a resounding impact. Chancellor Merkel was furious with Tsipras for having the audacity to challenge the EU elite by going to the people and testing the concept of the general will. The financial media and its purveyors of pabulum could only see this move by the Greeks in its impact upon the equity markets–and marginally the global bond markets. The outcome for the debt markets is a mixed bag for some bonds rally while the debt of smaller peripheral economies take a hit as the risk-off trade is initiated to the possible negative fallout from the lopsided Greek vote of NO.
Mr. Santelli interviewed me today and the topic evolved into Christine Lagarde and the IMF. The conversation was based on previous blogs as we discussed IMF culpability in the Greek debt crisis. The Santelli Exchange is linked below (click on the image). Also, I would advise reading the comments on the previous blog, especially the words of wisdom from University of Illinois finance professor Kevin Waspi.
There is not doubt that Larry Summers is excited by October G-20 and IMF meetings as the top policy makers meet to discuss the state of the world economy and other significant global interests. It’s a time when the media is focused on the world’s leaders and Mr. Summers likes the role of being a major player. There is no question about Summer’s academic qualifications and his wealth of policy making experience. If success in the field of economics was based on eugenics, well, Larry Summers would certainly have a Nobel Prize. My one major criticism of Secretary Summers was his running interference for Robert Rubin and Sandy Weil in their efforts to repeal Glass-Steagall, which even Mr. Weil has admitted was a great mistake. In today’s Financial Times, Larry Summers had an op-ed, “Why Public Investment Really Is A Free Lunch.”
The big news story from the weekend has been the warning from the central bankers’ banker, the Bank For International Settlements (BIS), that financial markets have become “… detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms.” The BIS annual report warns about leaving ultra-low interest rates for too long a period. The Financial Times article reported what I consider to be the most significant piece of the report: “Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing FORWARD THE DOWNWARD LEG OF THE CYCLE AND THAT OF SUFFERING A BIGGER BUST LATER ON” (emphasis mine).
Tread lightly into the throes of Fedspeak for first comes the FOMC statement a 1 p.m. CST followed by the last press conference of Chairman Bernanke’s term at 1:30 p.m. The markets are going to be volatile as confusion reigns in all asset classes. Today, the Treasury market was trying to reassert a steepening bias into the 5/30 yield curve as the FIVES were strong and the 30-YEAR YIELDS were rising. However, by day’s end the 5/30 retraced and closed unchanged on the day (if you trade the curve in futures terms the ratio is almost three FIVES to one THIRTY-year bond). Consensus has changed and the bias is for a tapering the question is: HOW LARGE? I have assumed a $20 billion tapering and I will stick with that “bold” conjecture. It is important to listen for any language of forward guidance on the unemployment threshold for if the Fed were to hint at lowering the 6.5% threshold, markets will reverse course, especially the S&Ps and DOW, which have spent the last few days in correction mode.
This reference is to Janet Yellen’s testimony in her Senate confirmation hearing as the chairman-to-be cited the benefits of the Fed’s policy of über low rates for the average household. While many Senators challenged the negative effects of the Fed’s policy for savers–financial repression in the words of Carmen Reinhart–Yellen noted that people were not just savers but also consumers. Thus, Fed policy may harm the return on savings, but households may receive the benefit of lower home and auto loans and the Fed’s QE policy may have had the ripple effects of getting their college graduate a job. So financial repression was a very difficult outcome to measure against the broad economic outcomes.
ECB President Mario Draghi has been able to convince the world that the Euro’s problems have been contained and it is safe to re-enter the financial pool of credit assets throughout Europe. The July 2012 speech that proclaimed the ECB had no taboos and would “do whatever it takes” to preserve the euro has been a masterpiece of doing nothing while generating the desired outcome. The master plumber of all things credit (JA) alerted me to the ECB’s balance sheet (as seen on the Bloomberg terminal). After Mario Draghi pledged to offer the Outright Monetary Transactions (OMT) to any European country that contracted with the ESM or EFSF for help, the sovereign debt markets in Europe have quieted and yield spreads returned to a sense of normalcy. Many people believed that the euro currency would suffer from Draghi’s promise of massive liquidity to meet funding needs. The EURO shorts were wrong and the proof lies in the three charts I am providing.