Overnight Sentiment Better On Yet More Easing
In a world in which markets are simply policy instruments of central planners it is no surprise that the only thing that matters is how much money is injected by any given central bank at any given time. Last night, following the Fed and the BOJ, it was the turn of Australia, which in a "surprise" move cut policy rates by 25 bps. From SocGen: "Reacting to a weaker global economic outlook, which has moderated the outlook for growth in Australia, the Reserve Bank of Australia cut its policy rate today by 25bp to 3.25%, a move that was predicted by only a minority of forecasters (including us). Nevertheless, we believe that markets are too aggressively priced for further rate reductions: we expect a low of 3.00%, to be reached by year-end, but the swap market is currently discounting a low of 2.4% by mid-2013. The reasons the RBA stated for lowering rates centered mostly on the global economic outlook, which has softened over recent months, not least because of greater uncertainty about near-term prospects in China, and hence the outlook for Australia is seen as a “little weaker”. The RBA also stated that the resource investment peak may be lower than previously thought." Sure enough, the move sent Australian stocks to 5 month highs, and global equity futures spiking. Of course, in the open-ended global race to debase perhaps it is more surprising i) they did not do this sooner and ii) not more banks have "cut" yet. Ironically, while the ECB, BOE and SNB are still contemplating next steps to catch up with Bernanke, it is the BOJ which in the abysmal failure of its own QE 8 from three weeks ago, is now contemplating QE 9 - the foreign bond edition (because buying treasury and corporate bonds, ETFs and REITs is never enough). Naturally, all this additional liquidity and promises thereof, has sent futures to fresh highs as more and more latent inflation is loaded up in the global monetary system.
Reuters shows the Japanese straw man:
Newly appointed Japanese Finance Minister Koriki Jojima sounded a cautious note on the idea of the Bank of Japan's buying foreign bonds as a method of future monetary easing.
"From the standpoint of the current BOJ Law, careful consideration would be needed," he told a news conference after a cabinet meeting on Tuesday.
Jojima's remark comes a day after newly appointed Economics Minister Seiji Maehara said that such purchases represent one option for easing, and that the yen's strength had gone too far.
The BOJ, which eased monetary policy last month, will hold its next policy-setting meeting this week.
In other news we got the usual rumor mill on whether or not Spain will request aid. This narrative really deserves little additional commentary: either they do, or they don't. What happens next is a topic we have discussed extensively in the past. Furthermore, even if and when Spain does formally admit it is broke, it is largely irrelevant if the ECB buys it bonds as it will have no impact on its economy, confirmed by today's data point on Spanish initial claims, which rose by 80,000 in September. In US population terms, this would be the equivalent of a 536,775 initial jobless claims in one month.
The number of people registered as unemployed in Spain rose by a little under 80,000 in September as summer tourism season came to an end.
The Labor Ministry says the total number of people registered as jobless is now 4.71 million.
Spain is in its second recession in three years with an overall unemployment rate of nearly 25 percent. It is debating whether to seek a bailout for its economy similar to those already granted to Greece, Ireland and Portugal.
For the balance of overnight news, we go to the traditional best source of such a comprehensive recap, DB's Jim Reid:
Little new news has come from Spain over the last 24 hours after last week's flurry of activity but we did hear from Moody's who came out stating that its recapitalisation estimates stand higher than what Spain is currently estimating in order to maintain stability in "adverse and highly adverse scenarios.". They went on to say that "If market participants are sceptical about the stress test, negative sentiment could undercut the government's efforts to fully restore confidence in the solvency of Spanish banks". It does seem like they have their finger on the downgrade trigger (to HY) but the question is whether they stay patient and wait to see the end game to this request for aid stand-off before making a final decision. It probably matters less than it did mid-summer now that we have the ECB backstop facility in place but the final outcome will still be important for the market as longer dated bonds still need a home even if the front end is being looked after by the ECB/ESM.
Back to markets and the positive sentiment was aided by Bernanke reiterating his stance on monetary policy as he spoke yesterday in Indianapolis. According to Bloomberg, Bernanke stated that "We expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens." Despite these words and some signs of economic life, the market will be building up to Friday's non-farm payrolls and unemployment data. With the Fed explicitly targeting unemployment this number increases in importance again from its already high impact level.