"The big picture" by Marshall Gittler: New hopes on the US government stalemate The dollar continued its recovery overnight. The trauma in the US seems confined largely to the Treasury bill market, and even then, to the very short end. Yields on bills maturing in the next month or so soared on talk that participants in the repo market would refuse to accept them as collateral; for example, the yield on the T-bill maturing Oct. 17th rose from 0.28% to 0.48%. Yet yields elsewhere were fairly stable; the two-year note was up less than 1 bp, indicating that the market still believes the drama will be short-lived. Stocks closed little changed and the VIX fell slightly, indicating no increase in fear despite the heightened stress in the short end. The steady tone in stocks may be due to the nomination of Janet Yellen as Fed Chairman, owing to her reputation as a dove on monetary policy who is likely to keep rates low until the recovery is well established. It could also be due to reports that there have been more contacts between Democrats and Republicans and an increased likelihood of some agreement. One prominent reporter for a distinctly conservative publication tweeted that the “real debate” within the Republican leadership is “when” to bring a bill for a six-week extension to the debt ceiling (as opposed to “whether” to bring one). This would just buy time for more negotiations and who says these negotiations would be fruitful? It could just set us up for a re-run six weeks later. But in any event this solution would take the immediate pressure off the markets, and with some face-saving concessions by the Democrats we might be able to move on from this nonsense. That hope has boosted the dollar against all the G10 and most EM currencies this morning. The major event today will be the Bank of England’s Monetary Policy Committee (MPC) meeting, and even that’s likely to be a non-event. I would expect a non-descript comment similar to that which followed the September meeting – almost as little as prevailed before Gov. Carney took over. With the economy clearly on the mend and most economic indicators exceeding expectations there’s little need for a further boost, and in any case even Gov. Carney has said he doesn’t see a case for further QE. On the other hand, they’ve already given forward guidance that they won’t raise rates until the unemployment rate is below 7%; it’s currently 7.7%, so there’s not much likelihood of a move there (nor are the inflation knockouts likely to be hit, with the inflation rate trending down.) At most we might see a statement that could incorporate something like what they said back in July about how they disagree with the market’s forecast for rates. But since they dropped that line in September and rates are pretty much where they were then, I see no reason for them to be more concerned now. The focus then will shift to the minutes coming out later in the month. As for the pound, I expect GBP/USD to move lower towards 1.5500 or lower as the pace of improvement in the UK economy slows and investors start to realize that the BoE is indeed serious about keeping rates low for longer than it would have under its previous monetary framework. At its core the UK recovery is led by consumers saving less and spending more, and there’s a limit to how long and far that trend can go. Also, once people have stopped focusing on the surprising recovery in the British economy they may start thinking more about the country’s worrisome current account deficit. Other indicators out today are French and Italian industrial production for August. These are both expected to turn around to a rise mom after a dip in July, a forecast that gained some credence after yesterday’s announcement of a rise in German IP in August. In the US, weekly jobless claims are expected to rise slightly to 310k from 308k, which probably would not be market-affecting. BoJ Governor Kuroda and ECB President Draghi will both be speaking in New York. We have also three Fed speakers.
Posted on: Thu, 10 Oct 2013 06:33:14 +0000
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