Back in 2010, when few still dared to question that the entire move in the market is predicated on the Fed's daily POMO (then still on QE2), we laid out, in a way so easy even a caveman could grasp it, how every tiny move in the stock market is nothing but a function of the Fed's daily POMO on those days in which Bernanke would be directly injecting liquidity into the capital markets using his Primary Dealer frontmen. Since then nearly three years have passed, and thousands of POMO days. All of which brings us to this quarter's Treasury refunding presentation, and specifically the section "Effects of policy and market structure" from the Presentation to the Treasury Borrowing Advisory Committee, in which we learn that we had in fact been right all along, and that perhaps for the first time ever, the Treasury admitted that not only "no one dares fight the Fed" but that, as expected, it is "all POMO."
With calls for a European renaissance and a general belief in stability through the German elections, it is perhaps worth a reminder of the structural problems that the supposedly bottoming union is facing. Nowhere is that single monetary policy-facing dilemma more evident than in the massive economic growth divergences across the EU nations and the current huge gap in unemployment rates from Greece to Austria and beyond. It seems the world is waiting for Merkel's re-election and fold on austerity (seemingly confirmed by the leaked BuBa report recently) but EU stress test transparency may remove the symbiotic safety net of bank bond buying sooner than many believe. With monetary policy somewhat euthanized across the EU, what's left for the fragmented transmission channels but more promises as pension funds and banks are stuffed to the gills with their own domestic bonds.
In the past the Jackson Hole conference very much revolved around the Fed chairman with the opening remarks often the top (and most market-moving) news from the junket. Despite an interesting docket of speakers and presenters from a central banking perspective (as BofAML details below), with no major Fed officials scheduled to speak (and only Kuroda turning up from the rest of the major world central banks), the markets are likely to pay a lot less attention to Jackson Hole than in the past.
Following this period of extraordinary monetary policy accommodation, Barclays Barry Knapp notes it stands to reason that, although there is some room for additional risk premium contraction (the aggregate measure for the S&P 500 remains above the long-term mean), the equity market on a stand-alone basis can hardly be considered cheap. In fact, looking across a broad range of balance sheet and income statement metrics over a period we would characterize as representative (albeit with a somewhat large dispersion of 1973-present), the equity market is above the long-term mean on every measure. But it gets better. There is little doubt that liquidity will prove challenged in coming weeks but market participants appear to be far too relaxed about events as equity market risk measures are close to the low risk point of their post-crisis range. So expensive valuations and risk complacency - BTFATH?
Abenomics was being hailed as the modern Japan’s answer to worries and woes, but it seems that Prime Minister Shinzo Abe will now most certainly have to put off dealing with Japan’s national debt as the economic outlook in the country looks decidedly compromised
In a somewhat stunning revelation from the masters-of-money-printing, the SF Fed (whose former head is none other than alleged Fed chairwoman frontrunner Janet Yellen) has found that "asset purchase programs like QE appear to have, at best, moderate effects on economic growth and inflation." One has to wonder why this sudden change of heart? Perhaps to pave the way for the less-than-enamored-with-QE Larry Summers' arrival... as we noted previously his views that “QE is less efficacious for the real economy than most people suppose." Or maybe this is a way for Ms. Yellen, to ingratiate herself with the president by indirecly toning down expectations she would go "feral hog" on the CTRL-P button? In any case, markets appear a little concerned at this rising Fed canon of removing the liquidity spigot despiet the all-time-highs in stocks.
The Bank of England has missed its inflation target more than any other major European central banks in the past five years. As Bloomberg Brief notes, while BOE Governor Mark Carney linked monetary policy to unemployment last week, the BOE has failed to meet its CPI goal 90 percent of the time. Hungary is the second-worst performing, having missed its target 88 percent of the time. The best performers have been the Swiss and Norwegian central banks, which have a 5 percent and 20 percent miss rate, respectively. To rub further salt into the open wound of hope in the UK, it has also had the largest average deviation from its target inflation rate overall.
The middle of the month brings a mixture of second-tier macro numbers punctuated by the market-moving (and Taper-cementing) retail sales report. We get IP, CPI and PPI from the US this coming week. In terms of hard activity numbers, US retail sales on Tuesday will be the highlight which as a reminder is, in addition to Jackson Hole, seen as one of two key pre-Taper catalysts to keep an eye on. Outside the US, the key data will be the quarterly publication of German, French and Eurozone GDP, as well as Japanese GDP, which has already been released (weaker real growth, higher inflation). The second week of the month also tends to show the first survey results with the Phily Fed and Empire surveys on Thursday. In Germany the ZEW will come on Tuesday. Finally, from an FX point of view, we will be focused on balance of payments related data, with the trade balance in India and TIC data in the US. After a few very weak TIC releases in recent months we would expect more evidence of weak capital inflows into the US.
Despite an overnight surge in the Chinese markets, with the Shanghai Composite closing up 2.4% following reports that China will not only continue with its "liquidity tightening" operation by, paradoxically, cutting RRR for smaller banks, but launch a stimulus for several Chinese provinces and city governments "on the quiet" in the form of jumbo-sized bank loans, and GDP news in Japan that were so bad they were almost good (although not bad enough to close the Nikkei in the green) US futures continue to take on water following the second worst week of 2013 as the market now appears resigned to a Taper announcement in just over 5 weeks (as we have claimed since May). News in Europe continues to be bipolar, with the big picture confirming that only dark skies lie ahead following yesterday's news that a new Greek bailout is just around the corner, or rather just after the Merkel reelection (even though Kotthaus perpetuated the lies and said a second cut in Greek debt is not on the agenda - although maybe he is not lying: maybe only Greek deposits will be cut this time), offset by on the margin improvements in the economic headlines, even as credit creation remains not only non-existent but as the FT reports (one year after Zero Hedge), some €3.2 trillion in financial deleveraging is still on deck meaning an unprecedented contraction in all credit-driven aggregates (one of which of course is GDP).
The origin of today’s monetary policy of course lies in Keynesian economics, and Keynes was quite explicit that monetary authorities should intentionally use deception as a primary tool. He spoke of the need to gull workers into thinking that wages were going up even if net of inflation they were going down. At least he had a sense of humor about it, calling a central bank a "green cheese factory" that would persuade the public to accept "green cheese" (newly created money) as the real thing.
While Janet Yellen's chances of becoming the next head of the Fed are plunging, those of Larry Summers are soaring, and it may be all due to a simple Freudian slip by the president. For those who missed, below is the full transcript of Obama's Friday's Q&A on the topic of who will succeed Ben Bernanke. Perhaps the most notable component: the president's pre-slipped reference to Janet Yellen's gender. Because if "he" occupies so little of Obama's attention, then what really are "his" chances of becoming the most important woman in the history of the world? To wit: "I have a range of outstanding candidates. You've mentioned two of them — Mr. Summers and Mr. Yellen — Ms. Yellen. And they're both terrific people."
Just too many coincidences.
With all of the problems afflicting the world economy nowadays, inflation seems to be the least of our worries. In addressing the post-2008 economic malaise, which stems from over-indebtedness, policymakers are correct to focus on the threat of debt deflation, which can lead to depression. But dismissing inflation as “yesterday’s problem” could undermine central banks’ efforts to address today’s most pressing issues – and, ultimately, facilitate inflation’s resurgence. Understanding how the Great Inflation from the late 1960’s to the early 1980’s was tamed offers important lessons for addressing far-reaching economic problems, however different ours may be, and provides insight into the dangers that may lie ahead.
Short-term, dollar risks still appear on the downside, but this appears largely corrective in nature. Medium-term, a higher dollar still appears to be the most likely scenario.
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- Without even a wristslap: Iksil to face no U.S. charges in 'Whale' probe (Reuters)
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- China slowdown shows signs of abating (FT), even as...
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- SAC Business Plan Goes to Judge, Plan Would Allow Firm to Maintain Business Operations but Restrict Its Ability to Move Assets (WSJ)
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- Mark Carney plays down scepticism over interest rate policy (FT)
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