Market Eyes Fed
Tue Apr 24 17:02:50 2012 (EDT)
The Fed takes center stage on Wednesday as markets gear up for some subtle hints of the Fed's policy prospects in the short- to medium-term. Our economists note that the Fed is unlikely going to alter its view that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. However, there may be some revisions to its normalization forecasts, forward from its current Q4 2012 view. This will be indicated in the Fed forecasts ahead of Chairman Bernanke's press conference. Neither an extension to QE nor 'Operation Twist' is to be expected.
The dollar appears to be treading water heading to the FOMC decision, though we doubt this is due to any underlying issue on the part of the Fed itself. Even if stimulus extension were an option, we view EURUSD as not the most suitable vehicle to express this view. The Euro itself has managed to navigate a few more short-term challenges this week than previously anticipated, and the consequent capitulation in some tactical shorts may have triggered the wider move. Rather, it is USDJPY which could have the most to lose from a Fed which is still stubbornly dovish, especially as most of the potential easing from the Bank of Japan later this week has already been priced in.
Given the scale of policy developments adopted in Japan over the past few years, it is hard to see any marginal impact on the JPY liquidity provision (but not outright intervention) could produce. With US yields still slumping despite relative data outperformance, material change in the Fed's view is the final piece of the puzzle needed to trigger the actual flows out of Japan by asset managers. Our flow data suggest this is happening on a selective basis, but could easily be unwound should Bernanke's more dovish views win over not just the FOMC but the wider Federal Reserve System community. The FOMC aside, UK GDP is out on Wednesday, while the RBNZ will also hold its policy meeting (out late US time).
EUR
Targets: EURUSD 1m 1.30, 3m 1.25
Reacting to the demands for a mandate of growth for ECB from politicians across Europe including France's presidential candidate Hollande, ECB's Weidmann said that such a debate is "not helpful" as it aims at a mandate for "monetary financing" of governments with consequences of "high inflation and uncertainty,"
Sovereign bonds of the peripheral countries rose after a successful auctions from Spain, Italy and Netherlands. The Spanish 10Y yields dropped by more than 12bp, Italy's by 5bp and Netherland's by 9bp at the time of this writing
The ECB announced that no bond purchases settled under the Securities Markets Program last week. We would not expect to see the facility reactivated unless sovereign yields in Spain or Italy approach 7% again.
EFSF sold EUR 3 bn worth of 7- year bonds. Though the issue was met with strong demand, with participation from Asia, central banks and sovereign wealth funds, the yields rose with a spread of 159.6 bp over German bunds.
ECB's Executive Board member Jose Manuel Gonzalez-Paramo said he's "absolutely convinced" that Spain will meet its budget-deficit targets and that Spain has done a lot to regain credibility.
Greece's central bank revised down its original forecast for the Greek economy, from -4.5% to -5.0% in 2012. Governor George Provopoulus urged the country's politicians to continue to stick to the austerity targets after the May 6th general elections warning that failure to do so will put Greece "very quickly in a particularly adverse situation" and "eventually driving it out of the euro area".
Bundesbank Chair Weidmann defended his opposition to further stimulus, warning that "If our actions lead to the sense of urgency disappearing, or political actions necessary to tackle the root causes of the crisis being delayed or postponed, then these are side effects that are detrimental." These comments support ECB President Draghi's earlier view that governments needed to play their part in the Eurozone's adjustment to promote growth, and not rely on ECB stimulus.
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Sinking Dutchman haunts the eurozone
Tue Apr 24 22:11:00 2012 (EDT)
FT Editorial: The political crisis in The Hague (Netherlands) shows another core country going soft on the eurozone's chosen strategy of universal austerity, with the hardcore fiscal disciplinarians looking increasingly under siege. Markets have been rattled by the inability of one of Europe's dwindling band of triple A rated states to do what it demands from others - and by the resulting political uncertainty, which compounds that of election-frenzied France.
The Dutch case is a horrific display of Europe's self-harming. But Europe's policy of austerity for all is dragging one economy after another back into recession - and the effect is not limited to the periphery. The bankruptcy of universal austerity is political as well as economic. The more clearly the eurozone's favoured policy is failing, the less credible mainstream politicians - still too loyal to Germany's demand for deficit cuts - will seem to voters.
On FX, concerns over "impact" of Austerity on Eurozone economies and political uncertainty continue to weigh on EUR. Though EUR remains resilient - locked in 1.30-1.35 range due to options - as WSJ blog piece on FX - more next. EUR/USD 1.3192-95, eye break of 1.3180/1.3140. GBP/USD at 1.6140-43, offers at 1.6150/1.6200. WL
