Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
It seems the only topic that currently matters to the market is central bank actions. The end of the week brings us the Jackson Hole, WY gathering of global financial policy makers at which Bernanke famously laid the groundwork for QE2 in 2010. Markets began one of their strongest runs since the March 2009 bottom, essentially running from September 2010 to February 2011 with only a break during November. However, as Bloomberg points out, the actual “easing” action didn’t come until after elections that year – in November. To further complicate things, we have Europe’s central bank in what seems to be a far more aggressive mode with Draghi at the helm versus Trichet. Both men have implicitly signaled something is coming with jawboning. The market has bought into it, and as I have stated in the past have almost backed the banks into a corner – i.e. “there is no turning back”. So it’s really about when, as much as what. And what is already “priced in”. Bloomberg has a bit of a less hopeful tone than Mr. Hilsenrath at the WSJ in terms of the potential for immediate gratification.
- Federal Reserve Chairman Ben S. Bernanke — returning this week to the scene of a 2010 speech that foreshadowed a second round of quantitative easing –probably will disappoint investors looking for him to signal new stimulus. Bernanke probably won’t use his Aug. 31 speech at the Fed’s annual symposium in Jackson Hole, Wyoming, to suggest a third round of bond buying is at hand, according to economists including Michael Feroli and James O’Sullivan.
- Two years ago, Bernanke said in his speech that the FOMC “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.” The committee didn’t announce a second round of quantitative easing at its September meeting, though; it waited instead until November 3 of that year. Markets rallied in the weeks after Bernanke’s 2010 remarks; “on the day, however, the speech was generally read as inconclusive,” O’Sullivan said. “Nor do we expect Mr. Bernanke to send a definitive signal this year.”
- “The Fed chairman’s Jackson Hole address has traditionallybeen used more for laying out broad themes than for sending specific policy signals,” said O’Sullivan, chief U.S. economist for Valhalla, New York-based High Frequency Economics, in an Aug. 27 report.
- “You can’t find a trader who doesn’t think Ben Bernanke is going to signal QE3 at Jackson Hole,” said Dan Greenhaus, chief global strategist for broker dealer BTIG LLC in New York. “But to have traders so convinced that this is a sure thing kind of screams there’s room for a letdown here.”
- Policy makers at the central bank have said they are prepared to provide new stimulus “fairly soon” unless they’re convinced the economy is poised to rebound, according to the minutes of the FOMC’s July 31-Aug. 1 meeting released last week. Bernanke sees “scope for further action,” he wrote in an Aug. 22 letter to California Republican Darrell Issa, chairman of the House Oversight and Government Reform Committee.
- Given the division among policy makers and mixed economic data, Eric Green, a former economist at the New York Fed, said Bernanke will want to use the symposium to clarify his views. The minutes from the last FOMC meeting “make Jackson Hole even more relevant because it will help resolve the tension between the Aug. 1 period, which preceded firmer data, and how the Fed is looking at things now,” said Green, now global head of rates and foreign-exchange research at TD Securities Inc. in New York. “The burden of proof is to see a sustained pickup in growth, and I don’t think we’re going to get that,” he said, predicting expansion in the third quarter will come in below 2 percent again. “The world will be looking for something very clear, and the odds are that he will deliver.”
- Bernanke isn’t alone in considering fresh aid for his economy. Joachim Fels, Morgan Stanley’s London-based chief economist, predicts central banks in the U.K., euro area, Sweden and Australia will ease monetary policy further, as will those in about 10 emerging markets, including China and Brazil.
- Mario Draghi, in his first year as president of theEuropean Central Bank, will participate in a Jackson Hole panel on Sept. 1, five days before he chairs a meeting of his Governing Council at which investors seek details of a plan to defend the euro region from surging bond yields. Draghi’s Aug. 2 pledge to craft the plan and declaration that the euro is “irreversible” were enough to drive a rally in Spanish and Italian bonds as investors bet the central bank will be able to quell the region’s debt crisis, now in its third year. The yield on 10-year Spanish government bonds fell to 6.42 percent on August 24 from a peak of 7.62 percent on July 24. Ten-year Italian bond yields were 5.71 percent compared with 6.6 percent in July.
- While Der Spiegel magazine this month reported the ECB is considering yield caps, economists at Goldman Sachs Group Inc. predict it will eschew explicit goals and instead intervene to keep market rates within a wide range. Draghi might wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund on Sept. 12 before unveiling full details of his plan, two central bank officials said last week.
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