Archive - Feb 2014

A week ago, we reported that unlike on previous occasions, this time Boehner decided to fold like a lawn chair early in this year's debt ceiling hike debate, and sure enough moments ago Politico confirmed as much when it reported that "House Republicans are abandoning their plan to lift the debt limit and restore military pension cuts due to flagging support from the rank and file. The announcement was made Tuesday morning in a private GOP meeting." As we also predicted, Politico adds that "now, the GOP will have to pass a so-called clean lift of the debt ceiling — one without policy strings attached. But even that won’t be easy. Senior Republican lawmakers and aides are openly wondering just how many of their members will vote for a clean debt ceiling — Democrats will have to bear the brunt of passing the bill, GOP insiders say." And the punchline for the vote, which is set for Wednesday, "Senior GOP sources wonder if they’ll be able to get 18 Republicans to vote for a debt ceiling increase — the bare minimum for passage if every Democrat votes yes."

To summarize: the GOP may have trouble being more Democrat than the Democrats.

We've seen the prepared remarks for both panels:

• Yellen - Fed 'easy' but staying the course on Taper
• Taylor - Fed policy is the problem
• McCloskey - Fed regulation has reduced Main Street access to banking
• Calabria - Fed exit strategy not credible; cause of instability, not cure
• Kohn - Fed independence at risk

So this morning's "Monetary Policy and the State of the Economy" (Humphrey-Hawkins) hearing should be a somewhat contentious baptism of fire for Janet as the Q&A starts.

BOTTOM LINE: Fed Chair Yellen's prepared remarks for her semiannual monetary policy testimony before the House Financial Services Committee were brief and did not contain any major surprises. The testimony itself will begin at 10:00am.

While Janet Yellen's testimony will be uneventful, with her toeing the party line, and the fluff Q&A largely priced in - although everyone is eagerly looking forward to the Maxine Waters grilling -  far more interesting in today's Monetary Policy and State of the Economy hearing, will be the Part 2, where various experts (full list here), mostly hawks as it would appear, will provide their rebuttals to Yellen's views. None of them is more anticipated than John Taylor - the Stanford economist whose "rule" the Fed uses, even though Taylor himself has largely disavowed the implications of the Taylor rule under current "extraordinary" conditions and has become one of the most vocal opponents of the Fed's unconventional policy. The punchline from his prepared remarks: "there is little evidence that the policy has helped economic growth or job growth. Growth has been less with the unconventional policies than the Fed originally forecast." Or precisely what we have been saying for about 5 years.

Treasury yields jumped 3-4bps higher on the release of the Yellen testimony but are rapidly reverting that loss. Gold and silver were double-slammed but gold remains above its late-day (pre-spike levels) from yesterday at $1280. Stocks and USDJPY entirely decoupled which must have shocked a lot of algos but having failed to ignite any momentum in stocks, USDJPY is now fading fast.

Just as Goldman has predicted (and the market had seemingly hoped would not happen), Janet Yellen, in her first speech as new Fed chair "stayed the course" on the Taper:

YELLEN SAYS FOMC LIKELY TO CONTINUE QE TAPER IN MEASURED STEPS
1YELLEN SAYS RECOVERY IN LABOR MARKET IS `FAR FROM COMPLETE'
YELLEN SAY FED TO `CONTINUE TO MONITOR FOR EMERGING RISKS'

Of course, the Q&A (and hawkish follow-up panel) may well be the "common knowledge" setting moment for today but for now, the Taper is on and forward-guidance

Pre-Yellen: S&P Futs 1801, Gold $1285, 10Y 2.68%, USDJPY 102.3

With only $24.5 billion left in FX reserves after valiantly defending major capital outflows since the Fed's Taper announcement, the Kazakhstan central bank has devalued the currency (Tenge) by 19% - its largest adjustment since 2009. At 185 KZT to the USD, this is the weakest the currency has ever been as the central bank cites weakness in the Russian Ruble and "speculation" against its currency as drivers of the outflows (which will be "exhausted" by this devaluation according to the bank). The new level will improve the country's competitiveness (they are potassium heavy) but one wonders whether, unless Yellen folds whether it will help the outflows at all. The Kazakhstan stock index is up 12% on the news...

It is not easy for one bank to anger more people with one announcement than what Barclays did in the past 24 hours. In one fell swoop, the British bank infuriated shareholders after announcing dismal earnings (an adjusted Q4 profit of about 200 million pounds and a statutory profit of less than 100 million as investment banking income slumped 37% as income fell 9% to 10.7 billion due to a fall in fixed income, and it took further charges related to a cleanup of the banking industry in the wake of the 2008 financial crisis) which sent the share price sliding, it then pissed off UK workers and taxpayers after it announced it would hike investment bank bonuses by 13% despite the abovementioned profit slump, and finally it crushed 9% of its workforce, or 12,000 workers, who are set to prepare pink slips as the bank "streamlines."

• Frustrated by Karzai, U.S. Shifts Afghanistan Exit Plans (WSJ)
• Yellen Testimony Guide From Payrolls Report to Emerging Markets (BBG)
• Gold hits three-month high, shares up ahead of Yellen (Reuters)
• Tightfisted New Owners Put Heinz on Diet (WSJ)
• Senator describes "gruesome" bin Laden photos (Reuters)
• More reasons for the ongoing economic contraction: U.S. Winter Storm Seen Spreading Snow, Sleet Across South (BBG)
• Barclays Cuts Up to 12,000 Jobs as Quarterly Profit Falls  (BBG)
• Boeing Considering 787-Size Medium-Range Jetliners (WSJ)
• AOL Chief Apologizes for ‘Distressed Babies’ Comment (BBG)

A sneaky overnight levitation pushed the Spoos above 1800 thanks to a modest USDJPY run (as we had forecast) despite, or maybe due to, the lack of any newsflow, although today's first official Humphrey Hawkins conference by the new Fed chairman, Janet Yellen, before the House and followed by the first post-mortem to her testimony where several prominent hawks will speak and comprising of John B. Taylor, Mark A. Calabria, Abby M. McCloskey, and Donald Kohn, could promptly put an end to this modest euphoria. Also, keep in mind both today, and Thursday, when Yellens' testimoeny before the Senate takes place, are POMO-free days. So things may get exciting quick, especially since as Goldman's Jan Hatzius opined overnight, the third tapering - down to $55 billion per month - is on deck.

We at the Fed are the platonic guardians of the global financial system.  And our logic is undeniable….

Fed Chair Janet Yellen will deliver her inaugural monetary policy testimony on February 11 and 13. Her prepared remarks will be released at 8:30amET and the testimony will begin at 10amET. Goldman, unlike the market of the last 3 days, believes that Ms. Yellen is likely to "stick to the script" in her first public remarks since taking over from Bernanke but they look for additional color on the following issues: (1) the recent patch of softer data; (2) the Fed's thinking on EM weakness; (3) the hurdle for stopping the taper; (4) the amount of slack in the labor market; and (5) the future of forward guidance.

It is becoming more uncomfortable to make fun of Dennis Gartman's always incorrect calls (see here and here and here and here) than to watch Richard Simmons Obamacare commercials, but... well - it's just too funny.

East Asia is becoming, in the language of international relations theory, "bipolar." Until recently, Asia was arguably “multipolar” - there was no one state large enough to dominate and many roughly equal states competed for influence. China’s dramatic rise has unbalanced that rough equity. Until recently, China pursued a “peaceful rise” strategy, one of accommodation and mutual adjustment. This approach sought to forestall an anti-Chinese encircling coalition. Since 2009 however, China has increasingly resorted to bullying and threats. All this then sets up a bipolar contest between China and Japan, in the context of China’s rapid rise toward regional dominance and such goals would broadly fit with what we have seen in the behavior of previous hegemons and a potential Sinic Monroe Doctrine.

Despite the yeah-meh-bleh nature of consumer confidence measures, Gallup's more broadly surveyed, and seemingly consistent with the reality of the American workforce, index of economic confidence remains lackluster at best and dismal at worst. However, there is one bright shining beacon of light across the "United" States of America... one state stands proud as the lone state that is economically confident... that state is... drum roll please... D.C.