BOE

Remember the whole UK stagflation scare, where the misery index recently hit a 20 year high, as both inflation and unemployment surged to two decade highs, keeping the GBP strong on expectations of rate hikes by the BOE? Well, the stagflation is still there, but according to just released BOE minutes, there has been a sudden 180 within the Monetary Policy Committee, which has now flipflopped, and just as we predicted, has fallen back to the traditional central bank fall back plan, namely "buy more bonds" as despite surging inflation, the country's central planners once again view deflation as a greater threat. As Bloomberg reports: "Bank of England minutes showed some policy makers see a potential need for further bond purchases as the economic recovery struggles and “downside” risks to growth and inflation mount. For the majority of the nine-member Monetary Policy Committee, “the fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand,” according to minutes of the June 8-9 meeting published today in London. “For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialized." So the spin now is not to worry about that surging inflation: it's "transitory"... just as the imminent UK QE2 will be: "While U.K. inflation was 4.5 percent in May, more than twice the central bank’s target, Governor Mervyn King said last week that the current price surge is temporary as he defended keeping the key rate on hold to aid the economic recovery during the government’s budget cuts. Paul Fisher said yesterday that adding to the bank’s bond program remains “very much on the table” as a policy tool." Next up: a major quantitative easing episode out of Japan as the two "peripheral" developed economies attempt to fill the void left by the Fed and fail miserably, at which point Bernanke will have no choice but to get involved as well.

David Blanchflower, professor of economics at Dartmouth College and a former policy maker at the Bank of England, was on Bloomberg earlier, discussing the flawed ECB decision to hike rates by 25 bps, just a day after Portugal went bankrupt, and calling it quite right, "a pretty big mistake." Blanchflower understandably compares today's move to the ill-fated hike in 2008 when the ECB was forced to promptly reverse course and loosen substantially when the bottom fell out of the market, although in reality today's situation is nothing like 2008 when one accounts for the EFSF which is essentially a Central Bank within a Central Bank: a pseudo pre-funded SPV whose only job is to provide liquidity to those countries in the block who are insolvent (and in the process keeping peripheral inflation rampant), while at the same time tightening liquidity in the core. In essence the ECB has been split in two: a good central bank and a bad central bank. The problem is the funding for the bad central bank is contingent on Germany which is becoming increasingly disenchanted with the whole failed Euro experiment, yet which is unable to leave the EUR since the DEM would surge by orders of magnitude to account for the country's strong economy, thereby burying the export sector. That in a nutshell is the summary of the tensions in Europe. And yes, Blanchflower is spot on that this house of cards construct held together by spit, superglue and prayer will all fall apart very soon.

When a nation's top central banker says that even he is surprised the middle class is not far angrier at the bankers, you know the lithium consumption is surpassing Surgeon General RDA levels. From The Telegraph "In some of his strongest language yet, Mervyn King today claimed the fall in
households' living standards was the fault of the financial services sector
and he expressed sympathy that innocent families paying the price. "The people whose jobs were destroyed were in no way responsible for the
excesses of the financial sector and the crisis that followed," he told
MPs on the Treasury Select Committee. The people who are now suffering "did not get bonuses of the scale people
in the financial sector got". The financial crisis may have occurred
two years ago but, as austerity measures kick in, "the cost is now
being felt", he said.It remains "a big political problem", he added: "I'm surprised the real anger hasn't been greater than it has." What anger? Doesn't Merv realize Joe Peasant simply looks at the closing level on the Russell 2000 and says: "Damn, bitch, I am rich. And the economy is just humming along. It just makes me so happy" More importantly, if he continues with that kind of talk, King would be well advised to not get closer than 500 feet to any book repository.

For now, developed markets remain strong, but the potential for EM spillover into DM exists. Perhaps it is the FX mode of transmission that catalyzes it, as the USD was bid today and looks to be creating a significant cycle bottom.

We believe Ben Ali tried the same quote. We are not sure if he used the precisely same wording: maybe that's why he was almost decapitated in the town square by a mob of angry and very hungry vigilantes. And if the quote above is FTW, then this one is FTMFW: "CPI, excluding currency, commodities and VAT impact, is low" also, let's not forget food prices, energy and petroleum byproducts. We totally agree with Adam: aside from everything, inflation is negative.

After WTI passed the $90 barrier with firm determination, as we highlighted earlier, the most recent DOE Crude Oil Inventories number confirms that the far larger than expected draw down is accelerating. As readers will recall, after last week's massive drawdown of 9.854 million barrels which was the largest in 9 years, today's number was another stunner, coming in at 5.333 MM on expectations of 3.4 MM. The result: WTI spikes and is last seen at $90.64. And as a reminder every $1 rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year. The move in oil in the past week alone has almost entirely wiped out the most recent stimulus. Furthermore, as we suggest earlier, now that $90 is in the history books, $100 is coming, and may be here within a few weeks. At that point Bernanke may have some problems explaining how he is "100% confident" that the surge in gasoline prices is completely and totally not as a result of his deranged genocidal tendencies.Don't worry though, hedge fund managers around the world will be more than happy to afford the surging prices. Remember: wealth effect!

All is fair in love and central bank war. Which is why we see the following headlines from England, showing just how important it is in the global game theory, which has now turned to outright war, how important it is to defect first.

• BOE's Posen: I think further monetary easing should be undertaken in UK, subject to debate
• BOE's Posen: If QE does not work, then time for further fiscal stimulus, corporate debt purchases
• BOE's Posen: Additional monetary stimulus should begin in the form of addition QE gilt buying

The British pound jumped 50 pips earlier after the BOE decided to keep rates unchanged at 0.5% and not increase the level of QE from the current 200 billion pounds. In a situation that mirrors our own, the bank's board saw one member,  Andrew Sentance, voting for a rate hike, with 8 others deciding to keep rates at the current 0.5%. Sentance pushed for an increase in the rate to 0.75 percent on concerns that inflation expectations may become dislodged. And in a somewhat analogous loosening-tightening dynamic to that of the US, even as many had expected the BOE to actually loosen some more by raising the amount of QE, the bank kept QE total at the existing level, without adding on a Lite, 2.0 of some other silly designator. The reason is that unlike in the US with its doctored core CPI metric, the UK is already experiencing inflation over 3%. As BusinessWeek notes: "Annual consumer-price gains exceeded the 3 percent ceiling in July,
requiring King yesterday to send a public letter of explanation to
finance minister George Osborne on how he plans to control the cost of
living. King argued that inflation has been driven higher by “temporary”
factors and reiterated the central bank’s readiness to change policy in
either direction." It appears that for the time being, the US is all alone, and well in the lead, in the currency debasement via more printing race.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 05/08/10 (BOE and ECB Rate Decisions)

In a rare dose of realism, Reuters reports that the BOE's Monetary Policy Committee member Adam Posen said there is a distinct chance the UK economy could slip back into a recession. Not surprisingly, the BOE member said eurozone public sector cuts would add as a drag on the UK economy. He also added that he hopes the recovery would continue but it can not be guaranteed. As the BOE has demonstrated no problems in the past with activating money printing QE episodes, is this merely a preamble to yet another round of English quantitative easing? As was pointed out on Zero Hedge over the weekend, recent changes in excess reserves in the US have provided the implicit benefit of nearly $200 billion in new Fed money entering the pursuit of risky assets, and everyone knows that the ECB is now on crash course with Germany over its own most recent monetization regime. It should thus come as no surprise that the UK feels alone and will likely do all it can to pursue the same currency devaluation techniques that seem to be prevalent across the globe, and not be left too far behind.

Reflexivity is a bitch.

Late yesterday, the FRBNY posted the full terms of the various FX swaps that it instituted as part of the bailout of the Euro, and of various French and German banks. The specifics of the rescue agreements with the BOE, the ECB and the SNB are below while the Bank of Canada and BOJ swap details are still pending. One thing we know is that all swap arrangement will have a maximum duration of 88 days. Surely at that point they will merely be rolled over as the Euro could be facing parity and various European banks will all be on the verge of bankruptcy due to the $6 trillion USD/EUR underfunded mismatch which the BIS and Zero Hedge have previously discussed. Yet a critical missing item is the full size of each specific swap, leading us to believe that the Fed's latest swap lines are limitless in size. If the expectation is that the Fed should not be constrained by how large any given swap line can get (and even in the first European bailout round each swap line had a hard ceiling), one can speculate that the Fed fully anticipates European dollar funding needs well into the trillions. Which of course would mean that the Fed's balance sheet is about to go up by 50% on behalf of rescuing Europe... And that FR banks will make double the expected $1.25 trillion in interest on excess reserves. Thank you US taxpayers.

The recovery has been uneven around the globe. The US with heavy stimulus has returned rapidly to positive growth (whether we can sustain it is a completely different debate), Swiss real estate was never really affected by the quasi worldwide slide and GDP in Switzerland is expected to be between 1% and 1.5% for 2010, and Canada has not only returned to positive growth but it also has to consider slowing down a bubbly real estate market. Meanwhile Europe's leading rebounder Germany is not guarantied to post positive GDP for Q1, Greece is wondering wether debt refinancing and what it will take will lead to civil war, Spain's industrial output is still approximately 30% off of what it was in late 2007, and Japan is discussing extending QE. The least we can say is that the bottoming process is rather uneven based on where you live, and with rates at near 0% everywhere or almost, we look at what relative value opportunities may present themselves as central banks debate how to transition from QE to more "normalized" liquidity environment and finally towards higher rates. - Nic Lenoir