Archive for the ‘Interest Rates’ Category

Notes From Underground: Wikileaks confirms it–the Walrus was Paul; and Chinese data is suspect

December 7, 2010

Last night, the RBA voted to hold Australian rates steady at 4.75 percent. Governor Stevens showed us his usual, steady hand in the BANK‘s statement as he provided us with a global view that weighed heavily on Aussie monetary policy. The strength of the Aussie dollar kept the RBA from raising rates as the bank had unexpectedly raised rates in November and was content to see if the U.S. and European economies can overcome their current malaise. The Chinese and Indian demand were responsible for the best terms of trade for OZ since the 1950s and growth in other Asian nations was brightening the jobs and capex picture even more. In a few paragraphs, Governor Stevens and his comrades are very clear that Australia is the epicenter of the Asian growth story and the RBA will be watching for indicators that Australian employment is getting too tight for the BANK to move rates higher.

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Notes From Underground: Obama and Peggy Lee … is that all there is?

September 7, 2010

The labor day period ended and the markets returned to risk-off profile as the media was awash with stories about the European stress tests being flawed. It seems that some analysts have awoken to the fact that the European tests were curved so as not to be overly bogged down by sovereign debt issues. There is nothing new to this as we talked about the flaws in the tests when they were administered, but the market ran with the “story” anyway and so we had a day of risk off. In addition to the Euro stress tests there was some softer German manufacturing data, which aided the equity selloff and, of course, put downward pressure on the EURO and other non-dollar currencies. The YEN, SWISS FRANC and GOLD were the biggest beneficiaries along with the long end of the global DEBT markets.

The Japanese are certainly not happy with the YEN strength but at this time it seems like there is not a great deal that the BOJ or MOF plan to do. In a Wall Street Journal opinion piece by Naomi Fink, who we consider to be a first-rate analyst, argues that the appreciating YEN may well be a blessing for the Japanese. We don’t agree with her analysis at the present time, but we think she raises many interesting points and is certainly worth reading and considering.

In Australia, we heard that Julia Gillard has cobbled together a Labor-led coalition in Australia. If the outcome means that the resource extraction gets watered down, we would view this as a positive for the AUSSIE. The Labor program has yet to be finalized  so we are still cautious in our Aussie bullishness. The RBA stood pat on rates and offered a somewhat hawkish statement, but global growth uncertainty tempered any Aussie growth prospects.

Tomorrow morning we will hear from the Bank of Canada. The market is mixed about the probability of a rate rise–overnight rates are currently 75 basis points and it’s 50/50 that they will raised to 100 basis points. As with Australia, we will read the statement carefully. The latest data in Canada has been mixed but the BOC has been desirous of getting ahead of the curve but we want to see if the lack of U.S. growth causes the Canadians to hold rates since they remain cautious because of slowness in the other developed countries.

A reader of ours raised a question about the reason Larry Summers is in China during recent economic policy headlines from the OBAMA administration. The point raised was that Summers may be there to inform the Chinese that there are plans to refinance MBS mortgages and because China holds a great deal of that paper they want to let them know what the plans are and the potential impact the REFINANCE will have on the Chinese. Maybe a mark down of MBS is a far less painful path than to have tariffs and surcharges imposed on Chines imports. Senator Schumer is banging the drums louder for Chinese revaluation, which will benefit no one but send fears of an impending trade war. We stress again that the biggest bang the Obama administration can get would be a massive refinance plan, which would result in much lower monthly mortgage payments and aid millions of people who are currently underwater on their homes but would stay current with a much lower monthly payment.

Renowned investor Wilbur Ross added more support to this argument. Ross, who has invested heavily in the finance business in the last two years believes that the government should aid homeowners to avoid “negative equity rat holes.” In an interview, Ross said “holders of MBS securities should get tax benefits for giving borrowers better terms.” Yes, we know that ROSS and his companies will come out to the good but we only care if the policy makers latch on to this concept. Mortgage relief is what is needed to halt the rise in foreclosures, which is putting even more pressure on bank balance sheets and thus tying up the securitization market. Credit will not flow until banks have some sense of certainty that the downward pressure on residential real estate is abating. The effort to stem the balance sheet recession has to begin somewhere. Why not mortgage relief? Drips and drabs of tax relief will not prevent further write downs or get credit flowing, for as the market asked today: Is that all there is?

Notes From Underground: Canada raises rates and Austalians are stressed by Europe

July 20, 2010

This morning, the Bank of Canada (BOC) raised rates to .75 percent as the market widely anticipated. The Canadian dollar was sold off after the announcement as the statement following the INCREASE was considered to be rather dovish going forward. Mark Carney, head of the BOC, said the bank was concerned about the European debt crisis and the continued balance sheet repair going on in the household and government sectors in the developed economies. The BOC felt that investment was tepid due to the cited global uncertainties. It raised rates but still believes that ample monetary stimulus is in place and its removal will be very dependent on the global growth story.

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Notes From Underground: Two banks, no waiting

March 3, 2010

The Bank of England and the European Central Bank both grace us with their wisdom tomorrow. We certainly expect no change on policy from either institution. The BOE is basking in the glow of a depreciating currency and for the moment, the British debt markets are relatively quiet and rather well behaved considering the weakness of the currency. So we say carry on boys and depreciate your way to prosperity. The ECB would probably like to raise rates just to rile the world, but the PIIGS prevent the Northern Europeans from flexing their schadenfreude. So we will see an unchanged verdict and Trichet will do his dance at the news conference and feed the frenzy of the financial media.

We will stress ad nauseam that the European situation is totally a political story waiting for a political resolution. The economics have been played out and nothing but politics matters. Frauline Merkel needs to put an end to the dance and flex her political advantage to put Axel Weber into the ECB presidency and declare victory.

Berlin reported that average wages in Germany fell for the first time in modern history as the recession took hold. Wages in the manufacturing sector were hit the hardest. This is what makes the situation for the peripherals so difficult. German labor costs are so competitive that it will take severe contraction in wage rates in the PIIGS to stop the bleeding. There is just no way out.

The downward pressure on wages is what makes any economic resolution so dire, for wage contraction is ultimately a credit event starting a negative feedback loop. The only alternative would be a surge in German inflation to ease the burden on the other Europeans but as today’s wage news showed, that appears to be a non-starter. Now we await Friday’s unemployment report and we will have more to write about that tomorrow as we will see more data and hopefully get a better feel on the consensus.

Notes From Underground: Bazookas versus torture chambers-Rambo or the Marquis de Sade?

March 1, 2010

The European debt news is getting stale as the accusations and denials from all the main actors in the drama are getting tiring, to say the least. The on-again, off-again political agreements are causing the markets to suffer vertigo. We caution Frauline Merkel that if she fails to achieve German control of the ECB, her government will suffer a tremendous decrease in authority even if the ECB does not fall. The contagion of the DEBT problem does seemed contained as the Spanish, Portuguese, Italian and Irish bonds all seem to be holding to their recent differentials versus the Germans. It may solely be due to threats leveled at hedge funds and other market players if they continue to pressure the European debt markets through the use of credit default swaps and other speculative instruments.

When U.S. markets were under similar assault back in the summer of 2008, then-Treasury Secretary Hank Paulson cautioned the markets that he had a bazooka he could utilize to halt the market ravages caused by speculative excesses. Today we read of threats from Luxembourg’s Prime and Financial Minister,  Jean Claude Juncker, who said if the market contrives to speculate against Greece, “we have the torture equipment in the cellar, and we will show them if needed.” Can the difference between the Americans and the Europeans be more stark? If we were going to challenge a government, we would take our chances with the torture instruments–of course with our eyes wide shut. Mr. Juncker better understand that the market s will challenge his threats just as they did to Hank Paulson, only to find out that his bazooka was a water  pistol.

We report that the RBA raised interest rates tonight, from 3.75% to 4.0%. Glenn Steven, RBA governor, cited the thaw in global credit conditions as well as the new found growth in the global economy. Stevens also noted that because Asian  credit markets were not under stress, growth in Asia has been sustained to a much higher level then the rest of the world. The crux of the RBA statement deals with the strength in Asia and the need for the Aussies to get interest rates back to trend. The Aussie has sold off about 30 pips since the announcement, as the long AUSSIE trade is a very crowded arena. It will be important to see if the AUSSIE DOLLAR can hold its support levels even in what appears to be an overbought market.

On Tuesday morning, 8:00 CST, we will hear from the Bank of Canada on its rate decision. The market is anticipating a no-change from  the current 25 basis points. We will pay attention to the BOC statement to see if its decision is motivated by the strength of the LOONIE. If the motivating force to stay on hold is the strength of the currency , we would look for the Canadian Dollar to be initially sold. Oh well, back to looking for a new leather outfit.