Fisher

Perhaps no sentence sums up the dismal reality investors face with the 'communications' strategy, the credibility, and the actions of the Federal Reserve, better than the following statement from Dallas Fed's Fisher:

• FED'S FISHER SAYS VOTE LAST WEEK NOT TO TAPER DID NOT REFLECT THE DISCUSSION AT THE POLICY-SETTING TABLE

It seems that we should therefore ignore each and every Fed whisperer and President (voting or non-voting) as only man counts... Et Tu Yellen...

We have heard from the doves, now the hawks. Dallas Fed's Fisher (a non-voting member) pulls no punches in his speech this morning. Confirming Esther George's comments last week, and our views on the same:

• *FISHER SAYS HE TRIED LAST WEEK TO PERSUADE FOMC TO TAPER QE
• *FISHER SAYS DECISION NOT TO TAPER QE UNDERMINED FED CREDIBILITY

But that was not it. The well-known hawk went to warn that:

• *FISHER: BIGGEST BANKS ARE `DAGGER POINTED' AT ECONOMY'S HEART
• *FISHER SAYS NO QE TAPER ADDS TO `UNCERTAINTY' ABOUT FED POLICY

None of this should come as a surprise as Fisher told Santelli earlier in the year that "this cannot go on forever!"

Following the FOMC surprise, no less than twelve Fed speeches will provide some "clarifications" on where the Fed now stands. It is very likely that this subject will continue to dominate the discussions of market participants. At the same time, US data will get scrutinized after the recent weakening and to see how warranted the Fed's concerns were. Two US consumer sentiment surveys, durable goods orders, and the third reading of Q2 GDP are important. In addition, monthly consumption and income data for August provide more information on the third quarter and of course there will be interest in the latest weekly claims numbers after some distortions in recent readings.

The German elections came and went, with Merkel initially said to have an absolute majority, but in the end being forced to design a Grand Coalition. Still, the punditry has been tripping over each other desperate to make that result (or any other result) positive for Europe , which despite now paving the way for policy continuity, together with the latest round of less than impressive Eurozone PMIs (following the strongest China HSBC PMI in 6 months) failed to inspire appetite for risk in Europe this morning where stocks have traded mixed. What is amusing is that everyone expected, the second Merkel gets reelected things in Europe would start going pump in the night - sure enough, the Italian FTSE-MIB is underperforming in early trade amid reports that Italy's economy minister Saccomanni threatened to step down if the country does not stick to its pledges it made to the European Commission. However to a certain degree, the negative sentiment towards Italy was offset by €4.8bln of coupon payments and €24.1bln of redemptions from Italy which is eligible for reinvestment this week. With a second Greek 2-day strike in one week scheduled for Tuesday and Wednesday, look for Europe's catalytic event to unclog, now that the German political picture is set, culminating with the 3rd (and 4th) Greek bailouts and probably more: after all Europe now needs a lower EURUSD (recall Adidas' warning), and that usually means a localized crisis.

Dispassionate macro overview.

Still Laundering Terrorism and Drug Money ...

• Hedge Funds Cut Back on Fees (WSJ) as we predicted would happen in May
• Syria's Assad denies chemical weapons use; U.S. presses case for strike (Reuters)
• Unemployment Falling for Wrong Reason Creates Fed Predicament (BBG)
• U.S. tapped into networks of Google, Petrobras, others (Reuters)
• Chinese Zombies Emerging After Years of Solar Subsidies (BBG)
• Monte Paschi doubles planned capital hike to 2.5 billion euros (Reuters)
• Loan Size to Be Cut for Fannie, Freddie (WSJ)
• Japan Growth Revision Opens Door to Sales Tax Rise (FT)
• Inside the End of the U.S. Bid to Punish Lehman Executives (NYT)
• Financial Crisis: Lessons of the Rescue, A Drama in Five Acts (WSJ)
• Time Warner Joins IBM in Health Shift for Retirees (WSJ)
• Mideast Derails Key Issues in Congress (WSJ)

As macro news continues to trickle in better than expected, the latest batch being benign (if completely fake) Chinese inflation data (CPI 2.6%, Exp. 2.6%, Last 2.7%) and trade data released overnight which saw ahigher than expected trade balance ($28.5bn vs Exp. $20.0; as exports rose from 5.1% to 7.2%, and imports dipped from 10.9% to 7.0%, missing expectations), markets remain confused: is good news better or does it mean even more global liquidity will be pulled.  As a result, the release of an encouraging set of macroeconomic data from China failed to have a meaningful impact on the sentiment in Europe this morning and instead stocks traded lower, with the Spanish IBEX-35 index underperforming after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games. Even though the news buoyed USD/JPY overnight, the pair faced downside pressure stemming from interest rate differential flows amid better bid USTs. The price action in the US curve was partly driven by the latest article from a prolific Fed watcher Jon Hilsenrath who said many Fed officials are undecided on whether to scale back bond purchases in September. Hilsenrath added that the Fed could wait or reduce the programme by a small amount at the upcoming meeting. Going forward, there are no major macroeconomic data releases scheduled for the second half of the session, but Fed’s Williams is due to speak.

September is likely to be dominated by a number of key event risks, in addition to ongoing uncertainty around the US growth outlook, the Fed’s reaction function and heightened EM volatility. We highlight the major events and likely market implications.

As rising Taper (and QE unwind) uncertainty, the biggest trade driving the rate complex, and by implication, the entire risk complex, is being put (no pun intended) to rest. As BofA explains: "the FOMC (the biggest buyer of duration and convexity risk in the world) is long the option to taper asset purchases (and eventually raise rates) if the data improves. That leaves the market short the option that the Fed may decide to taper. The market has looked to hedge this “short gamma” exposure by selling duration and buying vol."

A look the end of the rising cycle and the start of the falling cycle, including its dynamics and capital destruction. How does the central bank respond?

The Fed and other central banks have accomplished a huge feat: a worldwide tsunami of hot money. Which is now receding.

The week ahead will be relatively quiet with few major data releases. The main focus will be on the Flash PMIs in the Eurozone and China as well as the FOMC minutes and Jackson Hole. In the US the relatively new Preliminary PMI has been found useful by our US team in forecasting the ISM. Existing and new home sales are additional data points of interest in the US.  The key focus this week will be on central bank action. Minutes from the FOMC and the RBA will be followed by rate decisions in Thailand and Turkey. Finally, on Thursday starts the annual Jackson Hole conference with lots of Fed speakers, including Yellen next weekend. Chairman Bernanke, whose term ends in January, will not attend.

In lieu of the Japanese government doing the right thing and finally coming clean about the epic environmental catastrophe that is Fukushima, which it hopes to simply dig under the rug even as the inconvenient reality gets worse and thousands of tons of radioactive water make their way into the ocean, one is forced to rely on third-party sources for information on this tragedy. We present a useful primer from Scientific American on Fukushima "water retention" problem and "what you need to know about the radioactive water leaking from Japan’s Fukushima nuclear plant into the Pacific Ocean."

Succinctly summarizing the positive and negative news, data, and market events of the week...