Monthly Archives: August 2012

Romney Says Paul Ryan to Be His Republican Running Mate

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A very hard right turn.

The right doesn’t like Romney, but would have voted for him any way just to thwart Obama. And, if anything, the right sees this as a Ryan ‘sell out’ which he’ll strive to show otherwise, hardening his positions on ‘fiscal responsibility’ and the rest.

What this does do, however, is frighten the ‘left’ that had abandoned Obama into now turning out to vote for him.

That is, this creates an anti Romney that hadn’t previously been there.

Romney Says Paul Ryan to Be His Republican Running Mate

August 11 (Reuters) — U.S. Republican presidential candidate Mitt Romney on Saturday said he has selected Congressman Paul Ryan, 42, as his vice presidential running mate.

Romney, the presumptive Republican nominee, announced that he has tapped the House of Representatives Budget Committee chairman at an event in front of the retired battleship USS Wisconsin – coincidentally named for Ryan’s home state.

The announcement marks the end a months-long search by Romney for a running mate to join him in facing Democratic President Barack Obama and Vice President Joe Biden in the Nov.6 election.

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Greek funding

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Falls under ‘will do whatever it takes’
;)

Greece is in the process of trying to secure funding from Greek local banks to payoff 2.6 bb in Greek Government bonds maturing this month (4.10% 8/20/12) that are owned by the ECB and EIB. The Eurozone turned down a request from Greece for a bridge loan to pay off the maturing bonds. For their part, the ECB rejected a proposal from Greece to delay the payoff until September when Greece hopes to receive its next tranche of funding. However, the local banks have apparently been given approval to lend Greece the funds it needs to pay off the bonds and avoid a default. The Greek banks will then be allowed to use the loans as collateral at the Bank of Greece’s ELA program to secure the funds for the loan to Greece.

 
Again, here is a non-standard measure being considered to fund sovereigns that involves central bank funding, even if it is not directly the ECB’s direct lending.
This is just another example of access to unlimited funding via central banks.

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ECB Says It May Buy Bonds If Strict Conditionality Ensured

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A mixed bag.

It addresses the solvency issue and can bring rates down to whatever the ECB wants them to pay.

But the ‘conditionality’ likely continues the contractionary bias it’s already introduced.

If pressed as implied, this is a prescription for rising unemployment and political turmoil.

The euro zone has massive ‘demand leakages’ into pension funds, corporate reserves, cash in circulation,
the desire of foreign governments to hold euro balances, etc. that are a powerful contractionary bias.

They can only be offset by deficit spending by the domestic private sector, the foreign sector (net exports)
or the euro zone public sector entities.

In my humble opinion
nothing less than full public sector recognition of this ‘accounting identity’
is a necessary prerequisite to a constructive response.

ECB Says It May Buy Bonds If Strict Conditionality Ensured

 
Aug. 9 (Bloomberg) — The European Central Bank said it may intervene in bond markets in tandem with Europe’s bailout funds if troubled nations commit to improving their economies and fiscal positions.

 
“The adherence of governments to their commitments and the fulfilment by the European Financial Stability Facility/European Stability Mechanism of their role are necessary conditions,”

 
the Frankfurt-based ECB said in its monthly bulletin today, echoing President Mario Draghi’s remarks on Aug. 2. The central bank “may undertake outright open market operations of a size adequate to reach its objective.”

 
The ECB is stepping up its crisis response after Spanish and Italian bond yields surged, exacerbating a sovereign debt crisis that has forced five of the 17-euro members into seeking external aid. Draghi last week justified any potential intervention, saying rising borrowing costs in “several countries and financial fragmentation hinders the effective working of monetary policy.”

 
Still, “in order to create the fundamental conditions for such risk premia to disappear, policy makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination,”

 
the ECB said. “Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist — with strict and effective conditionality.”

 

Market Tensions

 

A further worsening of the crisis is likely to hurt economic growth in the euro area, “with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment,” the report said.

 
Today’s bulletin also contains the quarterly survey of professional forecasters. Their estimate for 2012 inflation remained unchanged at 2.3 percent. For 2013, they expect annual price gains to average 1.7 percent, down from 1.8 percent previously estimated, and for 2014 they predict 1.9 percent. The longer term inflation forecast remained at 2 percent.

 
On growth, the forecasters predict a 0.3 percent contraction for 2012, down from a 0.2 percent contraction expected last quarter. For 2013, they anticipate growth of 0.6 percent, down from a previous estimate of 1 percent. For 2014, they see the economy expanding 1.4 percent.

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MMT on the immediate restoration of the US’s AAA rating

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Not that it matters, of course, but all’s that’s needed is for the Fed to guarantee that all US obligations mature at 100. The Fed is fully authorized to buy US tsy securities and can certainly buy them at maturity value on their maturity date, simply by crediting the appropriate accounts. And the ratings agencies fully recognize that authority.

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ECB’s Hansson Says Germany Can Be Outvoted on Governing Council

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Karim writes:

This is correct. The Bundesbank voting no is technically equivalent to Lacker dissenting at every FOMC meeting this year. It would be a bigger statement if dissents came from the Executive Board (the equivalent of Yellen dissenting vs a regional Fed bank president).

ECB’s Hansson Says Germany Can Be Outvoted on Governing Council

By Ott Ummelas

August 3 (Bloomberg) — European Central Bank policy maker Ardo Hansson, who heads Estonia’s central bank, said Germany c be outvoted on the ECB’s Governing Council.

“There are 23 members in the council and if there will be a vote then everyone’s vote has the same weight in the sense that some questions are solved by a majority,” Hansson told Eesti Rahvusringhaaling radio today when asked if new ECB bond purchases can be approved without German support.

While there was unanimity on the council to investigate options in the coming month, “there could be differing views of details and these would need to be solved in negotiations,” Hansson said. He also said purchases will focus on “relatively short-term debt instruments.”

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ECB August Meeting

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Not to forget this is the just the beginning of ‘doing what it takes’ to sustain the euro, and make it ‘safe’ for investors.

That’s all inclusive, though not necessarily immediate.

And ‘anchoring’ the short end ‘automatically’ goes a very long way towards anchoring the long end with regard to risk premium.


Karim writes:

Draghi announced significant philosophical changes today. The key announcements were:

  • The ECB was ready to renounce seniority on its bond purchases.
  • The size of future purchases was open-ended: ‘size adequate to reach its objectives’.
  • Future purchases may not be sterilized, as they have been with the SMP so far.
  • Purchases would be front-end focused as that ‘falls squarely in line with monetary policy instruments’. A key instrument is obviously the LTROs. So would imagine purchases would be 3yrs and in on the curve.

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions [for some action on the ECB side]. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed.

Other news was that:

  • As in the excerpt above, purchases would be subject to strict conditionality via the EFSF (i.e., Spain has to accept a Memorandum of Understanding). Fiscal consolidation and structural reform were listed as the key conditions.
  • He threw cold water on the ESM getting a banking license, saying he was ‘surprised by the attention this has received’.
  • Logistics and objectives on bond purchases were TBD by a committee.
  • Further non-standard measures were forthcoming.
  • Rate cuts were discussed but unanimously voted down; as for a negative depo rate he said ‘we are in unchartered waters’, implying the hurdle may be high.

Relative to levels before Draghi’s London speech last week, Spanish 2y yields are 200bps lower, and 10yr yields are 50bps lower.

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Quick update

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A few more modest ‘green shoots’ including US personal income up .5, a few more jobs, houses and cars looking reasonable firm, etc. and markets starting to ‘undiscount’ a US recession.

Govt deficits remain plenty high to support income/sales/employment at current (depressed) levels and promote modest growth. Just as in the prior two double dip panics of the last several years, markets and the mainstream tend to give little if any weight to the notion that large deficits support aggregate demand. (Interesting how ideology seems to be adversely influencing their forecasting.)

So right now I see no fundamental reason for a meaningful drop in aggregate demand, apart from a politically driven external shock of some sort from Europe or maybe Iran, where there have been a few too many very recent noises regarding an Israeli attack for comfort.

Swiss Manufacturing Slump Unexpectedly Eases on Output Gain

By Simone Meier and Klaus Wille

August 2 (Bloomberg) — Swiss manufacturing contracted at a slower pace in July than in the previous month as companies stepped up production, suggesting that the economy is weathering Europe’s deepening slump.


The procure.ch Purchasing Managers’ Index rose to 48.6 from 48.1 in June, when adjusted for seasonal swings, Credit Suisse Group AG said in an e-mailed statement today. That’s the highest since March. A reading below 50 indicates contraction.

Marginal rise in construction output, but new orders continue to decline during July

August 2 (Markit) — At 50.9 in July, up from 48.2, the Markit/CIPS Construction PMI rebounded slightly from June’s two-and-a-half year low. However, the latest reading was well below the long-run series average (54.2). Growth was largely confined to the commercial sub-sector in July, as house building and civil engineering activity continued to decline. July data indicated a further reduction in new work received by construction companies. Although the rate of decline eased over the month, it was still the second-fastest since January 2010. Survey respondents widely cited a lack of new opportunities to tender and a general weakness in underlying market demand.

Sweden Krona Jumps as Rate Cut Calls Fade on Accelerating Growth

By Stephen Treloar and Johan Carlstrom

August 1 (Bloomberg) — Sweden’s krona surged, posting the biggest gains of all major currencies, after a report showed manufacturing unexpectedly expanded, damping speculation the Riksbank will cut interest rates at its meeting next month.

The krona rose as much as 0.8 percent to 8.2979 per euro, the highest since Sept. 11, 2000, and was up 0.5 percent at 8.3217 as of 1:15 p.m. in Stockholm. It surged almost 0.9 percent against the dollar to 6.7411, a three-month high. It gained against all 16 major currencies tracked by Bloomberg.

An index based on responses from purchasing managers rose to a seasonally adjusted 50.6 in July from 48.4 the previous month, Stockholm-based Swedbank AB said today. A reading above 50 signals an expansion. It was estimated to drop to 47.7, according to the median estimate in a Bloomberg survey.

“Following the surprisingly strong GDP number Monday this gives further ammunition for unchanged Riksbank rates at the September meeting and lends additional support to krona appreciation,” said Claes Maahlen, head of trading strategy at Svenska Handelsbanken AB in Stockholm, in a note today.

Sweden has been able to avoid a recession this year as companies such as retailer Hennes & Mauritz AB and Sandvik AB have benefitted from demand outside Europe and as the central bank cut interest rates. The economy expanded 1.4 percent in the second quarter as increased exports of services offset a decline in the export of goods. Consumer spending also rose.

The yield on Sweden’s two-year notes increased three basis points to 0.9 percent.

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Treasury Plans Floating Rate Notes, Looks at Negative

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It’s getting to be downright embarrassing to be an American…

Treasury Plans Floating Rate Notes, Looks at Negative Rate Bids

By Meera Louis and Cheyenne Hopkins

August 1 (Bloomberg) — The U.S. Treasury Department said today it is developing a floating rate note program that could be operational at least a year away, while it is also looking at capabilities for negative rate bidding.

The U.S. Treasury Department said it plans to sell $72 billion in notes and bonds in next week’s refunding. The Treasury intends to auction $32 billion in 3-year notes on Aug. 7, $24 billion in 10-year notes on Aug. 8 and $16 billion in 30-year bonds on Aug. 9.

“Treasury plans to develop a floating rate note program to complement the existing suite of securities issued and to support our broader debt management objectives,” the department said in a statement today. “The first FRN auction is estimated to be at least one year away.”

The Treasury also said it is “in the process of building the operational capabilities to allow for negative rate bidding in Treasury bill auctions, should we make the determination to allow such bidding in the future.”

The Treasury said that the U.S. debt limit is expected to be reached at the end of this year, and it expects to use “extraordinary measures” to fund the government into early 2013.

The Obama administration said July 27 it is forecasting the federal budget deficit will be $1.21 trillion this year, down from $1.33 trillion projected in February. The U.S. faces a so- called fiscal cliff of higher taxes and reductions in spending on defense and other government programs that will take effect at year-end unless Congress acts.

“I think it’s pretty clear that the Treasury has to tread lightly,” William O’Donnell, head U.S. government bond strategist at the Stamford, Connecticut-based RBS Securities primary dealer unit of Royal Bank of Scotland Group Plc., said by e-mail before the report. “There is a lot of uncertainty in the near-future path(s) of outlays and receipts and the fog may not lift until the fiscal issues are addressed.”

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