BOE

Six years ago, hardly anybody outside financial circles had any idea what Quantitative Easing was – hell, many within financial circles had no idea what QE entailed. The success of the narrative created around QE; that it is the mythical ‘free lunch’ that we all intuitively know can’t exist but secretly hope does, has played perfectly to the public and now, having endured for two electoral cycles, the next wave of politicians also believe it will have no consequences and are actually using it when planning the message they feel will endear them to the electorate. What plays better than free money?

Reading through the August inflation report two things seem to stand out:

1. The MPC is more optimistic on (domestic demand-driven) GDP growth – supported by growing wages, cheaper bank funding and growing house prices.  Indeed, they revised their growth projections slightly to the upside compared to May.
2.  The MPC has turned more cautious on inflation because of persistent commodity price weakness and, indeed, FX appreciation. This is reflected in their lower inflation projections.

Today the Bank of England releases its rate decision, minutes and quarterly inflation report (QIR) all at 1200BST with the QIR press conference to be held by Governor Carney at 1245BST. Given the volume of information on offer, the release is likely to be met with volatility.

It has been more of the same in the latest quiet overnight session where many await tomorrow's NFP data for much needed guidance, and where Chinese markets opened weaker, rose during the day, then went through a mini rollercoaster, then sold off in the afternoon.  The Shanghai Composite and HS China Enterprises indices finished down .9% and .3%, respectively. Trading volume continued to be very subdued, running at half the thirty day average as some 20 million "investors" have pulled out of the market to be replaced with HFTs such as Virtu.  But while stock action has been muted, the story of the night so far is oil and the energy complex broke out of a tight overnight range early in the European session to continue yesterday's downward trend, seeing WTI Sep'15 futures fall below the USD 45.00 handle after yesterday's DoE crude oil inventories saw US crude output rise by 0.552%. As of this moment oil was trading at $44.72, just pennies above the low print of 2015.

Standard Chartered’s new CEO Bill Winters thinks the bank is positioned well in "markets which will offer outstanding opportunities for decades to come", and while that may be true, the opportunities in those markets didn’t prove to be all that outstanding in the first half of the year, as the bank’s EM and commodities exposure contributed to a 44% decline in H1 profits and prompted a 50% dividend cut. 

• All surveyed analysts expect the Bank of England to keep monetary policy unchanged, with the bank rate at 0.5% and the Asset Purchase Facility at GBP 375bln

• Focus expected to instead by on minutes and Quarterly Inflation Report (QIR) release with minutes expected to show a 7-2 vote split on keeping rates on hold

• QIR will be analysed to see if it compares or contrasts to recent hawkish BoE rhetoric

Overly myopic investors/creditors will continue to be confident in various drillers, based on the numbers of initial production (IP) data extrapolations and balance sheets, but will in the near future spend sleepless nights wondering why such good IPs and strong balance sheets produces poor or no profits and/or why they do not fully receive the money lent. Their worries will gradually morph from being focused on return on investment to return of investment. The mysteries created by Nature’s lack of cooperation with the balance sheets will surpass any other existential questions.

The headlines are dramatic, ugly and depressing to anyone who holds gold right now. Broad market sentiment has shifted from disdain and dismissive to highly negative. Hedge funds are shorting gold aggressively, hedge funds that own gold are being "outed". The market pundits are are sticking the proverbial knife in and twisting it with glee. 

A non-bombastic analysis of the events and data in the week ahead, with insulting anyone or resorting to conspiracy theories.

We have argued that it is a perilous myth that central bankers these days control a general price level. They instead incentivize massive financial flows into securities markets and fashionable sectors. Over time, ramifications and consequences reach the profound. For one, excess liquidity promotes over/mal-investment. It’s only the scope and nature that remain in question. If major Bubble flows inundate new technology investment, the resulting surge in the supply of high-margin products engenders disinflationary pressures elsewhere. Policy responses to perceived heightened “deflation” risks then only work to exacerbate Bubbles, mounting imbalances and structural fragilities. This was a critical facet of “Roaring Twenties” analysis that was lost in time.

Regardless of where one thinks the dollar is going in the long-term, here is a discussion of where it will likely go in the short-term.  

We’re always interested in alternative economic frameworks that can help address the sizable gaps left open by classical approaches. Behavioral economics can fill part of that void, of course, as it describes some basic shortfalls in the assumption that we’re all superhuman welfare maximizing individuals. One step beyond that is evolutionary economics, which borrows from biology rather than psychology to form models about economic behavior.

Having exposed the reality that the world's capital markets are a manipulated shell game, Janus' Bill Gross has a message for the perpetual bulls in his latest letter to investors - "say a little prayer." Gross continues, "low interest rates are not the cure – they are part of the problem," warning that ZIRP has enabled, "a host of zombie and future zombie corporations now roam the real economy. Schumpeter’s 'creative destruction' – the supposed heart of capitalistic progress – has been neutered. The old remains in place, and new investment is stifled." As he previously warned, when the central bank manipulation is removed the likely trajectory of prices is downward...

• Fed expected to push ahead with rate hike plan (Reuters)
• Upbeat earnings lift European stocks ahead of Fed (Reuters)
• Chevron to Cut 1,500 Jobs (Rigzone)
• Can Windows 10 Revive PC Sales? (WSJ)
• U.S. Junk-Bond Buyers Left in Dark as Private Deals Become Norm (BBG)
• Jeb Bush Drawing Big Bucks From GOP Establishment (WSJ)
• Myriad of Greek Risks Means Money Managers in No Hurry to Return (BBG)
• Gas production at Gazprom set to hit post-Soviet low (FT)