Archive - Jun 9, 2011 - Story

While the bulk of the economic newsflow continues to come from outside of America, looking at our own mess today we see jobless claims, wholesale inventories, the trade balance... and Janet.

As expected the main financing rate is unchanged at 1.25% (and by implication the Marginal Lending Facility remains at 2.00% while the Deposit Facility remains at 0.50%). The EURUSD is drifting modestly higher but nothing remarkable. The key continues to be the upcoming conference.

European CDS is wider across the board. SOVX is 203 which is 4 wider on the day, and liquidity seems to have broken down completely as I'm seeing 3 bp bid/offer spreads rather than the more customary 2 bps. That is after it widened 10 bps yesterday. Fins at 163 (+4 on day) and Fin Subs 279 (+12 on the day) are also trading extremely poorly. Fin Subs, although fairly illiquid deserve special mention. They were 15 wider yesterday and although it is hard to tell with the rolls, it looks like they are almost at the widest levels of last March at the height of the first time the market noticed the sovereign debt crisis. The sovereign bond market looks to be in rough shape as well. Greek 10 year bonds are back below 54 on a price basis (16.35% yield). They have given up most of the late May gains. It rallied on the comments that the EU wanted a plan to bailout Greece again. It is fading on the fact that in spite of wanting a plan, it seems very difficult to come up with a workable plan.

• Obama Considering Another Stimulus Tax Cut (New Republic)
• Taxes on the menu in debt-reduction talks (Reuters)
• Americans torn over debt limit (WaPo)
• Dimon Challenges Bernanke on Wall Street Regulation (Bloomberg)
• The Great Property Bubble of China May Be Popping (WSJ)
• Beige Book confirms break in supply chain(FT)
• Trichet May Play ECB Rate Card as Germany Risks Split on New Greek Rescue (Bloomberg)
• Slow growth to anchor Bank rates despite price pressure (Reuters)
• President Obama Authors The Economic Recovery That Isn’t (Forbes)
• New Cracks in Oil Cartel (WSJ)

The key news today is not out of the US, but out of Europe, where the ECB will shortly announce that it will hold its main refinanincing rate flat at 1.25% (in line with the BOE's just announced "unchanged" decision, keeping rates flat at 0.5%), though what everyone will focus on is what will be said in the news conference following the decision, where the key phrase is "Strong Vigilance", whose utterance will send the EURUSD much higher on expectations for another 0.25% hike in July. It will also mean that inflation in the Eurozone continues to run up and is still largely out of control, as stagflation threatens not only the UK, but the core of Europe as well. From Reuters: "The ECB is expected to use higher staff inflation forecasts, to be published during Thursday's post-policy meeting news conference, as justification for higher interest rates to come -- probably starting with a rise to 1.50 percent next month. The ECB's Governing Council began meeting at 0700 GMT. The bank raised its main refinancing rate to 1.25 percent from 1.0 percent in April, its first tightening in two years. In the post-meeting news conference, ECB President Jean-Claude Trichet is expected to say the bank will exercise "strong vigilance" over price pressures, using a phrase that in the past signalled a hike was a month away. He used that code in March to flag April's rate rise." There is also a very minor chance that the ECB will hike rates today: "Firming cost pressures -- euro zone producer prices rose by more than expected in April -- mean a rate rise cannot be ruled out this month though the ECB's decision not to signal a hike makes it very unlikely. "I don't think the door to a hike in June is completely closed but given that the ECB has historically pre-announced a rate hike, a hike in June would be a surprise and would assume a change in communication strategy," said Nick Matthews at RBS." The problem is that every incremental rate hike simply means that the interlocked PIIGS markets will be further locked out of markets, as short term funding rates continue rising ever higher: the irony, stated simply, is that by fighting inflation for the healthy countries, the ECB is making the unhealthy ones even worse.

Gold is marginally lower while silver is showing strength again today after yesterday’s 'worst ever' OPEC meeting ended in disarray and saw oil prices surge. Markets await today’s ECB rate decision and signs as to whether interest rates are set to rise sooner rather than later. Signs of an interest rate rise in July should see the euro and gold rally versus the dollar. The precious metals are also likely to be supported by further sharp falls in peripheral markets bonds, particularly Greece, this morning. While all eyes are on the ECB today, there was a reminder late yesterday that it is not just the Eurozone that is struggling with debt. Fitch Ratings said it would put US debt on watch in early August if Congress fails to raise the federal debt limit. OPEC, the oil cartel’s increasing impotency was seen yesterday when Libya, Iraq, Angola, Ecuador and Algeria sided with increasingly influential Iran and Venezuela rather than Saudi Arabia and its allies Kuwait, Qatar and United Arab Emirates. Also, Japan’s nuclear crisis is leading to a decline in nuclear energy production, possibly long term in nature, and China’s massive drought has led to marked decline in hydroelectric energy production. There is increasingly the real risk of an oil crisis especially given the very tense geopolitical situation in North Africa and the Middle East. Separately, Iran announced it planned to treble its capacity to produce highly enriched uranium which alarmed western powers and was deemed ‘provocative’ by one international relations analyst. Oil prices have risen over 10 times since 1999. For gold prices to just catch up with the price increases seen in ‘black gold’, gold would have to rise over $2,500/oz (10 X $250/oz).

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