Friday, March 06, 2009

One Down, One To Go

One down, one to go.

Yesterday proved to be eventful, to say the least, as the Bank of England formally adopted QE, announcing that they could purchase up to £100 billion Gilts and £50 billion private-sector bonds as a new way of prosecuting monetary policy. It's hard to believe that it was only three months ago that the Bank "saw the light" about the state of the UK economy and the global financial system? You can't say that they haven't made up for lost time!

Amusingly, readers of the FT can find commentary that the Bank has either done too much (Martin Wolf) or not enough (Willem Buiter.) When everyone disagrees with you, that's usually a sign that you've done the right thing. Certainly the Gilt market likes it; 10 year yields have plummeted 50 bps since the announcement.

In Europe, meanwhile, the ECB also seems to have had a Damascene moment. How else to explain the revision to the staff forecasts, which now expect EMU GDP to fall 2.7% this year and for CPI to go negative by mid-year. Not that that is "deflation", however....more of an "extreme disinflation", peut-etre? Either way, rates look like going to 1% or below by June.

Today, of course, sees the release of employment data in the US. Yesterday's throw-away line about seven-digit office pool entries seems to have morphed into the hot rumour du jour, as Asia was rife with stories that the NFP would ring up the dreaded "million."

Frankly, Macro Man has no idea if it will or not (though he suspects not.) As always, the difficulty with the payroll number is discerning the signal (the shift in trend) from the noise (the 100k plus standard error around that trend.) That's why he prefers to focus on the unemployment rate; it might lag a bit, but the serial correlation is high and the magnitude of monthly changes provides information about trend strength.

Regardless of what the payroll report shows, today's U-rate should be a shocker; Macro Man's model based on the jobs hard to get component of the consumer survey suggests a 0.8% rise in the unemployment rate. Ouch!

"Ouch" is also a pretty apt descriptor of the foreign exchange market these days. recently volatility in EUR/USD has been fairly extreme, with virtually no signal to show for it. Yesterday the interbank electronic broking system went offline for most of the afternoon; given that virtually all spot guys who used to trade by voice alone have either retired or (ugh!) become salesmen, the market had little idea of how to trade. Carnage ensued. And then this morning, Macro Man was awakened by the dulcet tones of a text message telling him that Voldemort was up to his old tricks again. And Mrs. Macro wonders where the gray hair comes from....
One market where there definitely does appear to be a singal is Turkey, where the lira is getting roasted (sorry!) against all comers. A tax amnesty has expired, thereby eliminating a key source of TRY demand, while Turkish banks are facing a reasonably significant amount of debt roll-overs over the next month or so. Both USD/TRY and EUR/TRY have made new all-time highs over the past 24 hours, so technically it might be time to cue up a little Sinatra and play "Fly Me to the Moon."
Actually, finding out what spring is like on Jupiter and Mars doesn't sound like such a bad idea. I wonder how their banks are doing?


Incognito said...

MM, I was wondering what exchange listed instruments are available for taking views on european corporate credit spreads as well as sovereign spreads. The only futures contracts that I know of are the German sovereigns, which only have volume out to June-09. These are teh GBS, GBM and GBL (short, medium and long rates).

Everything else I guess is OTC or via swaps

Macro Man said...

Yeah, I think that is right. Eventually, it is likely that some credit products (CD, etc) will migrate to exchanges; there are some efforts in the works, but it seems to be moving a bit slowly...

NordicDude said...

So QE is finally and officially here. But how to stop the cash spent on buying securities being just hoarded by banks at the BoE a la 90's Japan? Either way, it's not good news for GBP. I'd be selling cable here.

Here's an interesting take from the folks at Cognitrend on some unconventional methods Mr JCT el al might wish to consider. They suggest the ECB recalls all €500 notes for exchange into other denominated notes, eliminating them as legal tender after a nearby date. The honest dirtfarmers would have them swapped out from under their mattresses and small business owners would redenominate their caisses noirs, but the truly nefarious underground economy would be at a loss to convert all its ill-gotten gains. There is a whopping €266bn of these notes in circulation. Some of it would remain at the commercial banks, a source of cheap liquidity that could only encourage lending. Those who have reservations about exchanging the money at a bank would still be free to spend it up to its sell-by date, thus stimulating the economy. And the VAT charges at the retail counter would even contribute to state revenues. Finally, the proportion that cannot be exchanged or spent could be written off by eurozone governments. Even 10 percent of this total represents more money than is currently being set aside for bailing out Eastern Europe.

Anonymous said...

Hey Macro Man,

Turkish banks are still coping well, or so it seems this week.

There has been Putinistic fear exist in the country with proIslamic govt and his sole leader Erdogan at power that every businessman (ditto for banks) are too afraid to say anything against govt, especially municipal elections looming come March 29.

However, the banks are doing much better financially thx to major regulations after 2001 crisis.

However, IMKB, the exchange is still doing well compared to other EM indexes. what gives?..

Great insights, fast recovery wishes from Istanbul.


Anonymous said...

the strong eurusd move started at 8am, isn't that a little late for voldemort?

Im not a macro guy at all, but if TRY keeps behaving like this cyprus will be the new ibiza..

Macro Man said...

The euro rally started about 6 am London time on a payroll day....right in Voldemort's wheelhouse.

And not to be pedantic, but most of Cyprus is in the eurozone...

Ivanovich said...

MM - someone pointed me to your blog - I gotta tell you, it's awesome. Bookmarked.

Thanks a ton.



Anonymous said...

I immensely enjoy your witty remarks and look forward to reading more of your daily accounts.

hope your knee is on the mend.

Charles Butler said...

Nordic Dude -

I think there's in fact more than 266 bn in 500's. Spain alone had issued about 114 bn, and that was thought to be about 25% of the total.

What I've been touting for a fairly long time is for the BCE and the Spanish tax department to coordinate a removal of the notes in circulation with a tax amnesty for amounts that cannot be justified - the latter contingent on holders of the notes investing them in longish term deposits. Instead, according to my cousin the tax inspector, they are tracing them in order charge back taxes. The effect here has been that almost no one will accept them as the under the table portion of property transactions, for example.

The advantage to powers that be of the actual procedure is that they get to be fairly selective as to who gets pinged because the tax laws put a 'statute of limitations' of four years on this type of infraction. The favoured will find their dossiers sitting on a desk beyond this limit.

MM - spare no effort or expense in dealing with your knee. I've been dealing with the after effects a similar, but badly attended to, injury for forty years.

Anonymous said...

anonymous: most, but not all.. Buy a condo on the turkish side and still be able to walk to eurozone parties! i'll put in another order.

Anonymous said...

If Brad's analysis is even remotely true re SAFE diversifying into equities at the top then Voldy isn't just a pain in the markets, he's a complete idiot too... Makes it even harder for the rest of us.

Adrem said...

Charlie Butler must have made your day. Forty years and still not right.

Macro Man said...

Thanks, Ivan, Anon for your kind words. JL, I don;t think Voldy is an idiot; quite the contrary, on a micro level he is quite canny in the way he screws over the foreign exchange market. On a macro level, however, I think he is so big that he's turned into a bit of a bull in the investment (pardon the pun) china shop. And that is, ultimately, down to a policy which seemed to make sense 5 years ago but which has quickly spiralled out of control.

CB, Adrem, I am trying my damndest to get it sorted...the surgeon wants me to rehab it more before reconstruction; I wanna get it done ASAP so I am fit to ski next season!

fajensen said...

@ NordicDude
but the truly nefarious underground economy would be at a loss to convert all its ill-gotten gains.

No problem at all: Just take them to the Horse-track (or the Casino) and get a receipt.

Whee - clean money; yes there *is* indeed an 18% tax (Denmark) on lottery and the track takes a 20% cut if one decides f.ex. to place a bet over the entire field in inverse proportion to the odds for a "sure win" - but, if one consistently plays "Place" (horse is one of the three first) the odds are good of getting your money back Bright and New!

That's what legal gambling is for: to make sure the state gets a cut even on the black money!

Anonymous said...

I read this article and was stunned:

I wasn't stunned by the IMF estimating that Britain has so far spent nearly 20% of GDP on bank bailouts. What stunned me was seeing Norway(!) as number two on the list at nearly 14%.

What is going on over there? Is there a hidden catastrophe unfolding in Norway?

NordicDude said...

@Anon 2:14pm
The IMF numbers for Norway are somewhat misleading. The 13.8% figure comes from the 350bn NOK liquidity package provided to Norwegian banks under a programme similar to the Fed's TSLF. i.e. a liquidity package and not related to bank bailouts.

In fact Norway has yet to inject a single krone as capital into any of its banks, although it has recently announced the reation of a fund that will inject up to NOK 50 bn in temporary tier 1 capital into the country's banks, representing around 2% of GDP.