Archive - May 5, 2011 - Story

This does not sound like the sound of European consensus: "The leader of Finland’s euro-skeptic True Finns party, Timo Soini, said Europe’s crisis-handling mechanism “doesn’t work” and Greece will default on its debts as efforts to keep the country afloat have failed. He spoke today in a phone interview with Bloomberg Television." More like the sound of inevitability...We wonder how this will be spun by Trichet. In the meantime, things in carry land are getting worse and worse, as the USDJPY hit 79.60 overnight, a level at which the Japanese economy joins Europe and the US in full contraction mode. The summer of central bankers' discontent is coming fast and furious.

Trichet says:

• CPI rates likely to stay above 2% in coming months
• Risks on economy from Japan disaster
• Geopolitical tensions pose growth risks
• Paramount that rise in HICP inflation does not lead to second-round effects
• Risks to medium term inflation outlook are on upside
• Inflation expectations must remain firmly anchored
• Monetary analysis indicates underlying pace of monetary expansion picking up but moderate
• Confirm banks have continued to expand lending to private sector
• Governments need to achieve their fiscal consolidation targets in 2011

Most importantly: he says nothing about a June hike which was largely "priced in" by the Wall Street lemmingraty.

And scene: jobless claims explode to 474K, beyond the worst economist expectation, far above consensus of 410K, and well above the previous (upward revised of course) number of 431K. This is the worst claims number since Aigist 2010. Game over for the US "recovery."

• China’s Top Fund Manager Favors Commodities as Inflation Worsens (Bloomberg)
• U.S. Warns China Is Closing Up Again (WSJ)
• Bullish for destroyed crops: France’s Second-Hottest April in Century Desiccates Farm Fields (Bloomberg)
• A Mission Not Yet Accomplished (David Leonhardt)
• FM for Flexibility in IMF Capital Flow Control Framework (Business Standard)
• Syrian Troops Storm Damascus Suburb, Make Arrests (Reuters)
• Hamas and Fatah sign reconciliation deal to end four-year rift (Xinhua)
• Central Banks Expand Gold Reserves With $6 Billion in Purchases (Bloomberg)
• BOE Holds Interest Rate at 0.5% on Signs Recovery Is Fading (Bloomberg)

Gold stabilised in Asian and early European trading prior to a 1% fall, while silver’s sharp price fall continues and silver is now down 20% in USD terms in 5 days. The huge and unprecedented increase in margin in the paper silver market has forced some weak hands out of the silver market and allowed the concentrated shorts on Wall Street to press their advantage to the downside.

The ECB rate decision (unchanged) has come and gone, and now everyone is focusing on the follow up conference at 2:30 CET (in less than 40 minutes), at which Jean Claude is expected to announce whether he will continue at the current rate of tightening with a June rate hike, or, since the global economy is once again contracting, will declare all those who called his rate hike decision idiotic, correct, and proceed to keep liquidity flat, if not loosen once again.

In line with expectations. The conference following the announcement is where everyone will be, expecting to hear if the ECB will tighten imminently, or, far more likely, not.

Quiet day in the US where just jobless claims will provide the last jobs datapoint before tomorrow's NFP. Attention will be focused on Europe where if not today, then very soon, Trichet will admit his mea culpa for hiking rates prematurely, now that the German economy is taking a big turn for the worse.

Following a near record surge in February, March German manufacturing orders plunged far lower than consensus, dropping -4.0% on expectations of a 0.4% rise, as a decline in investment goods limited growth in Europe's largest economy, the economy ministry said Thursday. "The participation of large orders was strongly below average," the ministry said in a statement. This eliminates any possibility of an ECB rate hike later today (to be followed closely by Zero Hedge), and validates our assumption that the ECB rate hike regime was flawed, and not only will Trichet not do anything today, but will be forced to return to a dovish stance within a few months, leading to a reversal of recent tightening and to a validation of Goldman's warning on the EURUSD which has at this point very likely topped out.

Goldman, which some time ago posited a 1.50 target in the EURUSD, is starting to get rather nervous about its recommendation: "We expect the dollar depreciation trend to extend in the twelve months ahead. In the near term, however, recent cross-asset correlations could mean that equity market softness would translate to dollar strength. This could especially be the case in the event that markets start to perceive the recent slowdown in data as deeper and more global in nature. This is not our expectation at the moment. However, given that we are less than 1% away from what was initially considered an ambitious target of 1.50 in our long EUR/$ recommendation, any incremental increase market volatility could significantly tilt the overall risk/reward of the trade. Hence we are watching relevant developments across risky assets closely." In other words, now that the intertim silver "bubble" has popped, the EURUSD may be next to follow, since the key requirement for a market drop, and further monetary easing greenlighting, is unexpected, and not priced in, dollar strength. Based on this Goldman piece, it may be coming very soon.

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