Tomorrow is FOMC day and as traders wait to see what happens volatility has fallen to a snail’s pace.
The big question on everyone’s mind is whether the Fed will taper asset purchases or not and the consensus seems to have drifted towards the “NO” camp as the minutes tick by before the big event.
Overall tapering is not expected as unemployment remains stubbornly high. Non-Farm Payroll figures for May showed an improvement but not sufficiently to really instil rock solid confidence. The actual unemployment rate rose from 7.5% to 7.6% when the Fed’s target is still quite far off at 6.5%. Earnings remain pressurized and average hours also low as more than the usual number of part-timers make up the numbers.
The Fed wants the economy to get on a sustainable footing before it cuts off stimulus and this is another reason many think it won’t taper yet. The housing market has recovered but it you look at the detail it remains compromised – most of the loans being made are to safe-bets – second buyers or buy-to-let portfolio purchasers rather than first time buyers or other higher risk profile customers. This sort of housing apartheid is another underlying symptom the patient is still not quite right.
If you look at another metric of the recovery – Retail Sales, who’s figures were recently so good, and you dig a bit the underlying reality is that the figures were enhanced simply because Spring/Summer 2012 was an unusually poor time for retail so it makes this year’s year-on-year headline figures look unduly good. So overall whilst there is a slow crawling recovery it remains to be seen how sustainable it is.
Another thing which could hinder a taper is the record low inflation being experienced in the economy. Apparently the inflation metric Bernanke favours has reached a 20-year low of 1%, whilst 5-year break-even rate showing inflation expectations 5-years ahead has reached an important support level which has traditionally been a point at which the Fed intervenes with MORE QE to bump it up – hardly a moment to expect the opposite.
However, there is an argument worth considering for the opposite which was stated by Bill Gross, the head of PIMCO the world’s largest Bond Fund. Yesterday his comment’s temporarily helped the dollar recover after he said that the Fed will probably cut QE altogether by the end of this year.
His argument is that the government borrowing will fall and the Fed’s purchase of treasuries will also fall because the Fed cannot buy 100% of the government’s debt. Government borrowing has reached a debt ceiling and it will become politically unacceptable to continue borrowing more (the ceiling has already been breached twice). Currently it borrows about 640bn per year to bridge the deficit; the Fed buys 45bn treasuries a month using QE, which equals 12 x 45bn = 540bn – only 100bn less than the total debt issued.
Finally, from what we have heard them say in public the voting members of the FOMC might be expected to vote in the following way:
YES – 1
NO – 8
? – 3
Draghi prepares Frankfurt’s printing presses..
Draghi discussed the possibility of bringing in some new non-standard monetary policy measures this morning when speaking at a engagement in Jerusalem.
The ECB President said: “We will look with an open mind at these measures which are especially effective in our institutional set-up and that fall within our mandate.”
Draghi added: “There are numerous other measures – standard interest rate policy and non-standard measures – that we can deploy and will deploy if circumstances warrant.”
The ECB’s June Economic Bulletin revived the possibility that the ECB might get more aggressive with its policy after it highlighted the endemic lack of lending by banks, the continued falling growth and rising unemployment.
On Friday we wrote: “It seems austerity can only do so much. For what does it matter if austerity keeps borrowing-rates down it there is no transmission down to the man on the street. It seems we have reached a point where lack of transmission is the big issue now. It is almost a fait acomplit that the ECB will have to do something soon about it whether that be via a further rate cut, a below-zero deposit rate or a more direct asset-orientated stimulus programme.”
All change at the BOE
On Saturday Paul Tucker, the deputy governor of the BOE surprised everyone by handing in his resignation. Although he had been expected to leave in the summer the announcement was earlier than expected. It had been speculated that Tucker was upset he was not given the top job at the BOE after Sir Mervyn King’s announced he was leaving. He is expecting to follow a career in academia. Whilst King was Pro-QE, Tucker was not so the overall voting balance on the MPC remains the same.
Bundesbank chief is ‘literary lover’
The head of the Bundesbank Jens Weidmann quoted Henry Miller at an opening to a speech in Paris recently, revealing a passion for avant-garde literature. The sometimes outspoken central banker opened a speech quoting Miller who said:
“God knows, when Spring comes to Paris, the humblest mortal alive must feel that he dwells in paradise.”
Wiedmann went on to discuss how, whilst Parisians might feel blessed to live in ‘paradise’ not everyone in the euro-zone felt the same. Exploring a favourite theme of the large disparity between the divergent nations within the union.
It was a fitting quote since Miller lived in austerity for most of his life, suffering for his art, and yet remained an optimist till the end, offering a strong role-model for us all in these hard times.
As fond lovers of Miller’s work here at Bank Watch, we salute your literary tastes Herr Weidmann.