Archive - Sep 2011

Ever the thoughtful wordsmith, Governor Perry just noted on CNBC that he would not reappoint Bernanke. He reiterated his inflationary expectations line-of-reasoning and added that monetary policy shouldn't "cover bad fiscal policy". Once again the topic of independence and transparency was tripping off his tongue - Ben better start printing soon as time seems to be running out.

• The German lower house passed the EFSF amendment bill with a leading conservative lawmaker noting that the coalition did not need to rely on opposition votes.
• Fed’s Bernanke said the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.
• German BDB confirms that the 90% target rate for private sector involvement in the second Greek bailout has been met adding that the ECB is well prepared to assist EU banks.
• Greek PM will travel to Paris on Friday to discuss debt crisis with French president Sarkozy according to a source.
• Banks and other private sector bondholders are resisting the idea of taking larger haircuts on Greek debt by lobbying countries such as Germany and the Netherlands.

As Europeans sell-the-news of EuroTARP's beginnings, we cast our eye to the macro data likely to spew forth this morning in the US. While markets have typically been ignoring much of the ECO data recently in favor of rumor and rumor-of-rumor and denial, there are some prints that may trigger human activity today.

• White House Reviewing Bill on China Currency, Carney Says. (Bloomberg)
• China Economic Growth Seen Less Than 5% by 2016 in Global Poll. (Bloomberg)
• German MPs back euro crisis powers, Merkel support unclear. (Reuters)
• Greece Faces Auditor Verdict, Fresh Aid at Stake. (Reuters)
• Business Attacks Transaction Tax Plan. (FT)
• Bernanke Tells US to Heed Emerging Economies. (FT)
• Bernanke: Unemployment Poses ‘National Crisis’. (Bloomberg)
• SEC Probes Banks Over Mortgage Loans. (FT)

A very small initial rally has given way to more significant selling now as credit and equity markets pull back, EUR drops, and Bunds have rallied 1-2bps. Selling the news makes some sense but is hardly confidence-inspiring...especially given subordinated financials decompression.

The German "TARP equivalent" EFSF expansion vote has passed with a resdounding majority of 523 votes For and 85 Against. Obviously this was largely priced in judging by the rapid sell off in the EURUSd on the news. And now, back to focusing on the structural failure of the Eurozone which no vote can fix.

Anyone who thought that yesterday's atrocious 5 Year E5 Billion bobl auction was a one off fluke may need to reevaluate after today's even uglier Italian bond auction which was not a failure in all but name, after the Italian Treasury raised far less than was targetted. As a result, Italian bonds have slumped, extending losses from earlier this morning. That said, we expect a near-term kneejerk reaction once the German EFSF vote ratifies as is broadly expected. Specifically, per Bloomberg, the 10-yr yield hit 5.69% after auction from 5.66% pre-auction; now steady at 5.66%, +2bps from yesterday, it also sold EU1.3bln vs targeted EU2bln on bonds due August 2021; Italy sells EU2.47bln vs targeted EU2.5bln bonds due March 2022 with avg yield of 5.86% vs prev 5.22%; 2-yr yield +3bps to 4.4% vs 4.37% pre-auction. The govt sold EU3.14bln due July 2014, less than the targeted EU3.5bln bonds; avg yield of 4.68% vs prev 3.87%; 5-yr yield +6bps to 5.08% vs 5.07% pre-auction Italy sold EU926m vs targeted EU1bln bonds due December 2015.

The German parliamentary EFSF ratification, which needs 311 votes to pass, has started. Follow it live at the following BBC live link

Remember when the Chairman did a quick drive by with the much price in Operation Twist, and the market came, saw, and plunged? That was a week ago? Two? Well, as we have been predicting since December 2010, that was merely the appetizer, or as we phrased it the same as last year's July QE Lite to last year's August QE 2. Confirming both our speculation, and the realization that Bernanke knows only how to print more money and nothing else, were his first public remarks since the launch of Op. Twist, at a Cleveland Fed forum last night in which he said that "the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly... Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains anemic. ""If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation," Bernanke said. The comment was made in response to a question about a recent decline in market-based inflation expectations, which policymakers see as a good gauge of future inflation trends." And since the key "deflationary" metric that he looks at, as wrong as it may be, is the stock market, looks for stocks to resume trading with schizophrenic abandon, surging ever higher on increasingly bad economic data. Of which we will have a lot.

Here is Goldman's Dirk Schumacher chiming in with his views on the German EFSF vote expected in 50 minutes, although which is now likely to take place at noon central European due to lengthy monologues in the German parliament. "Bundestag to vote on EFSF expansion this morning. The vote will take place around 11:00 CET. After a test vote among coalition MPs it now seems that Chancellor Merkel can rely on a majority from within her own ranks. This would be an important signal, showing that Merkel indeed does have the necessary support for her course among coalition MPs....SPD fiscal expert Schneider demanded that finance minister Schäuble should "give account" in the Bundestag if the increased EFSF would still be insufficient in size. Schneider referred to the IMF's latest Financial Stability Report saying that EU banks would need €300 billion in additional capital due to the debt crisis. Note, however, that the IMF says that the calculations in the stability report are not a stress test but rather measure "spillovers" from peripheral countries to the EU banking system and that "determining capital needs would call for a fully fledged stress test". In fact, reading the stability report it is not clear to us how to interpret this €300 billion figure."

All you need to read.

Today at 9:00 GMT, Germany is expected to vote on the EFSF in a much anticipated vote. Needless to say, while futures are slowly drifting higher on expectations of a favorable outcome, a negative vote will see the EUR plunge to parity with the USD and kill markets in minutes as it would mean that German politicians pick their careers over rescuing a failed monetary experiment and bailing out pathological big spenders and liars. As the BBC reports, "If more than 19 members of Mrs Merkel's coalition rebel against her, she will have to rely on the support of the centre-left opposition to pass the bill on new powers for the European Financial Stability Facility (EFSF)." And if she does that, we will have a rerun of Angela's ashes.

Citi's Economics team downgraded global growth expectations once again, expecting 3.0% this year (versus 4.0% last year) with more aggressive downgrades next year to only 2.9% (from 3.2% expectations last month and 3.7% two months ago). Growth revisions were downgraded for every major global economy as expectations move with Goldman's coincidentally-timed discussion of stagnation (also tonight) with advanced economies cut more than developed though Eastern Europe saw the most significant reductions. They note that 'the recent pace of GDP forecast downgrades is among the greatest of the last ten years' and extends the recent run of lower forecasts to four months-in-a-row. In a secondary note, Willem Buiter and team also pour cold water on market expectations for the EFSF pointing out, as we have done for a few weeks now at every suggestion, that all the different options have their shortcomings and are unlikely to be implemented quickly.

We have written extensively over the course of the last few weeks on the increasing rhetoric from Asia over currency fluctuations and furthermore how China was playing the US and Europe off against one another in a quasi-trade-war gambit. A flurry of headlines today/tonight via Bloomberg reminded us to revisit what is also a very worrying trend in Chinese CDS (and more broadly Asian sovereigns), as perhaps sophisticated investors look for the cheapest low cost long vol trades on a non-decoupled world devolving to its lowest common denominator. Between Carney's 'substantially undervalued Yuan' comments, record slides in Dim Sum Bonds, growing concerns over growth longevity, Japanese retail sales, Aussie home prices, Sony's troubles in currency-land, and Barclay's warning of a restart to the Yuan peg in the case of global recession - contagion and transmission channels appear alive and well in global trade.