Policy makers everywhere willing to reflate if necessary


The totality of what we have seen over the past two or three days shows that policy makers in the US, Europe and China all are standing at the ready to support reflation if the varying triggers they have are met.

The bar in China has been set with Premier Li basically saying he would leave stimulus alone unless the economy falls below target. What he is saying is that there is enough credit excess that the policy bias is hawkish. However, China will not stand idly by and allow a credit crisis or collapse in growth to happen without resorting to extreme measures. I had earlier written that this was the question – not whether policy makers would intercede but rather what the trigger for doing so would be i.e. how much pain would they be willing to mete out before being forced to react. Li has told us that China stands by its growth targets and so this tells me that the Chinese are not willing to take much more pain.

In the US, I see the Fed’s minutes and Bernanke’s comments as indicative of the same kind of thinking. The Fed is concerned about credit and market excesses and wants to taper as soon as possible. However, the macro picture is too murky to unequivocally do so. Inflation is running well below target and the jobs picture has not improved sufficiently. Therefore, the Fed is caught in a position of having to lay out a timetable for tapering QE in order to assuage hawks but maintain their ultra-accommodative stance due to the disinflationary tendency in the US. I also believe that the central tendency for the Fed’s economic forecasts is too high and that growth in the US will disappoint. This leads me to believe that tapering will now happen later. Moreover, the Fed is actively trying to divorce QE policy, which is less effective as a policy tool, from interest rate policy. Over time I believe the Fed will be successful even though there will be volatility getting there.

In Europe, the numbers are still weak but I continue to believe that we are seeing the makings of a cyclical recovery. The policy stance is considerably more dovish than it was just two months ago. Look at a post from Cardiff Garcia on the ECB to see what I mean. He said in May to watch what Draghi does and not what he says, meaning that his words were more hawkish than his actions were likely to be. And now we have confirmation of this. The Europeans want to be to the hawkish side of the US fiscally and on monetary affairs but they are still in easy mode and will do “whatever it takes”  to prevent crisis from re-emerging. The Spanish political crisis bears watching however because it could spill over into the markets and cause Spain to need an OMT backstop.

I have a lot of comments in all of the links below so you can get some more nuanced issue by issue comments there. That’s it for now. Links below

Coppola Comment: Economic equivalence: job guarantee and basic income

Ignore the bad news on emerging markets | Capital City | IFRe

I’m not sure I buy this but I do want you to read it.

Rupert Murdoch could face criminal charges in US – Telegraph

The third arrow’s lofty aim: the cases for and against optimism | FT Alphaville

U.S. Oil Soars Above $106 to 15-Month High – WSJ.com

Rate Surge Catches Banks Off Guard – WSJ.com

Remember that bank earnings are really just accounting gains until the loan loss reserves and mark to market accounting have been verified through the life of the banks’ assets. What we see here is that those accounting gains can be unwound in a major way. That’s what the crisis was about.

“The full percentage-point jump in long-term rates, the sharpest increase since 2010, already has eroded $31 billion in accounting gains from banks’ securities portfolios through late June, according to Federal Reserve data. “

Obama is laying the foundations of a dystopian future – FT.com

“This administration has, more or less, halted torture, removed troops from Iraq, set a timetable for withdrawal from Afghanistan, paid lip service to nuclear abolition and refused to invade Iran. The president has been more sceptical than most in Washington about intervening in Syria. He also sought to close Guantánamo, though his efforts thus far have been feeble.

So, no, he is not Mr Bush. But there is actually a case to be made that Mr Obama is, in crucial respects, actually worse than his predecessor. “

From Minutes To Bernanke – Tim Duy’s Fed Watch

Brad DeLong : The Largest and Most Rapid Shift in Expected U.S. Monetary Policy since 1994. The Largest and Most Rapid Contractionary Shift since 1981

DeLong thinks the Fed has erred in signalling a change in policy and brings some historical data to show this. I believe the overreaction was temporary and the panic will subside, causing treasury rates to drop over time.

Fed split in June on QE timing; Bernanke sees easy policy for now | Reuters

I like this overview from Pedro da Costa

“About half of the Federal Reserve’s policymakers felt the U.S. central bank’s bond-buying stimulus should be brought to a halt by year end when they met in June, but many wanted reassurance the U.S. jobs recovery was on solid ground before any policy retreat.

In the end, most of the U.S. central bank’s 19 policymakers felt it was a good idea to have Fed Chairman Ben Bernanke lay out a road map at a post-meeting news conference on how they likely would wind down the so-called quantitative easing program, minutes from the meeting released on Wednesday showed.

In doing so, Bernanke said the Fed would likely slow the pace of its bond purchases by year end, with an eye to bringing the stimulus program to a close by mid-2014.”

Many on Fed Awaiting More Job Gains Before Tapering QE: Economy – Bloomberg

These paragraphs express well where the Fed stands now:

““Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” according to the record of the Federal Open Market Committee’s June 18-19 gathering released today in Washington.

Today’s minutes said “several members judged that a reduction in asset purchases would likely soon be warranted.” Those members said the “cumulative decline in unemployment since the September meeting and ongoing increases in private payrolls” had increased their confidence the labor market had improved, according to the minutes. “

Half of Federal Reserve wants to end QE this year – Telegraph

This headline is totally misleading because all indications from the minutes are that the Fed is more dovish than originally thought. Yes, half of the members want QE to stop but that’s beside the point in terms of the significance of what we learned. I see this as an example of biased reporting from the Telegraph.

BBC News – Fed minutes suggest no immediate end to QE stimulus

“”Most (analysts) had expected September might be a good starting point. This throws a lot more doubt on that timeframe.” “

Spanish yields and the ECB’s austerity defence | FT Alphaville

Two months on, I think this post deserves reading because it is now clear that Europe has moved fully into dovish mode, the ECB with it. And so, watching what Draghi does instead of says tells us that the ECB ill do “whatever it takes.”

“In a post Friday, we highlighted the numerous recent instances of eurozone officials openly expressing the view that the push for austerity should be softened, at least temporarily.

Included on the list were comments by Italian prime minister Enrico Letta, EC president José Manuel Barroso, German finance minister Wolfgang Schauble, and economic and monetary affairs commissioner Ollie Rehn. And it could also have included the remarks by Christine Lagarde in April.

Missing from the list, of course, is Mario Draghi, who went the other way at Thursday’s ECB presser and cautioned that “euro area countries should not unravel their efforts to reduce government budget deficits”. He repeated a similar message in a speech earlier on Monday.

But unlike the other trials balloons floated at the presser, this might be a case of watch what I do, not what I say.”

Greece says it does not foresee fiscal gap this year or next | Reuters

Arbeitslosigkeit: Spaniens Jugend stürzt ab | ZEIT ONLINE

This German article is on Spain’s lost generation as youth unemployment remains at record levels. Do translate it and read.

Cinco cuestiones que debe responder Rajoy | ContraOpa | Blogs | elmundo.es

Caso Bárcenas: La oposición en bloque arremete contra el PP por ‘secuestrar’ el Parlamento | elmundo.es

Caso Bárcenas: Bárcenas al juez: ‘Hay muchas personas en España con activos en Suiza’ | elmundo.es

The Spanish slush fund scandal is heating up again. Originally, I had said I expected this to bring down the Rajoy government when it became clear to me that he was implicated. However, he has toughed it out so far. Now, new allegations are emerging. A collapse of Rajoy’s government would trigger a need for OMT. Article here in Spanish.

The wheels are coming off the whole of southern Europe – Telegraph

I believe this is overwrought and alarmist. Nevertheless, I have to link to the post because AEP makes good points and we should be cognizant of the downside risks.

ekathimerini.com | NPLs soar to 66 billion euros

German Chancellor Merkel Defends Work of Intelligence Agencies – SPIEGEL ONLINE

“Merkel Speaks: Chancellor Defends Intelligence Monitoring”

BBC News – Luxembourg PM Juncker to resign over spy scandal

Unemployment in Australia rose to 5.7% in June | World news | guardian.co.uk

A modest rise in interest rates could cause a million households to ‘collapse’ – Telegraph

House prices ‘will not recover until 2021’ – Telegraph

What Is Bank Capital, Anyway? – NYTimes.com

“Though capital is a centerpiece of Wall Street regulation, it resists a simple definition.

Capital is often described as a cushion that banks hold against losses. That’s true, but the implications are not always clear. One unfortunate misconception that can arise is that capital is a “rainy day fund.”

To understand capital, think about how a financial firm does business.”

A Call to Battle on Bank Leverage – NYTimes.com

European bank deleveraging and global credit conditions | vox

Chinese banks lend aggressively in early July, risking another crackdown | Reuters

Weak Trade Points to China Slowing – WSJ.com

This article is somewhat at odds with the optimism based on Li’s comments in the article below. Nonetheless, the overall gist is that China’s policy makers remained committed to their growth targets but are also trying to control excess credit growth. The result is they will refrain from adding stimulus unless absolutely necessary.

“”As long as the economic growth rate, employment and other indicators don’t slip below our lower limit and inflation doesn’t exceed our upper limit, [we’ll] focus on restructuring and pushing reforms,” Mr. Li told provincial chiefs on Tuesday.:

China Home Prices Jumped in May – WSJ.com

This is a story from last week that I missed. Home prices are rising at highest annual rate in two years.

Shanghai Leads Asia Rally – WSJ.com

“Chinese Premier Li Keqiang said Wednesday China needs to make sure that economic growth doesn’t fall below a lower limit while inflation doesn’t breach an upper limit, though he did not define the limits.

“The tone of Premier Li’s speech suggests to us that the policy stance in H2 may soften. In previous speeches and government documents, Li has rarely mentioned the need to ‘stabilize growth,’ instead focusing more on containing financial risks,” Normura economist Zhiwei Zhang writes in a note. “

PC shipments shrink 11 per cent in second quarter: report | Toronto Star

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