Wednesday's FOMC meeting is the focus of the week as market looks for debt monetization clues. Geithner says he has a plan for toxic assets.
The G-20 pre-meeting of finance ministers saw no real developments of note, as the finance ministers' communique contained no surprises and mostly consisted of a list of what areas of global financial markets need to be addressed by the April 2 meeting. The market was more interested perhaps in US Secretary of Treasury Geithner's announcement that he'll be offering a more detailed look at toxic asset clean-up. Any announcement he makes in this area better be convincing after he announced a plan on Feb. 10 that was a day late in coming and then failed to include any details (later it came to light that the original plan that was to be announced was scratched at the last minute, forcing Mr. Geithner to announce a plan that wasn't really there at the time). The S&P500 index dropped almost 5% that day. Mr. Geithner sits in the hottest of hot seats at the moment.
The AIG bailout details received considerable attention over the weekend, as AIG revealed the counterparties that received billions of dollars of US taxpayer money on AIG's profoundly stupid credit insurance risks made before it was semi-nationalized. As many commentators have pointed out, the AIG story shows that the CDS market was a massive gambling casino that allowed risk takers to place bets larger than the markets they were betting on and the only way to take away this risk would be to take all CDS contracts and feed them to the shredder.
So where are we going from here? The USD has sold off over the last couple of weeks, and the JPY even more so. This has coincided with a sharp rally in risk appetite last week as the market seems to be trying to place a bet that some kind of stabilization is under way in global markets based on Chinese stimulus efforts, for example, or vague hopes of a "new and improved" policy response. It's likely a combination of that as well as the market unwinding some of the extremes of its pessimism as part of the natural ebb and flow of market positioning. But we have a jaundiced view at best of this rally in risk: considering the cynical market response to almost every announcement from the authorities in recent months, we wonder if the next round of announcements will also be met with a new wall of selling pressure. We have a couple of possible key triggers/pivot points this week - first the Geithner Plan on toxic assets and second on the FOMC meeting. After that, the big event risk focus shifts to April 2. We see little if anything to get our hopes up about for the global economy, unfortunately. The key question for currency markets is how long the USD moves stay correlated with the moves in risk appetite and whether the FOMC meeting shows the Fed moving closer to debt monetization and what the market thinks of any such move. Our default expectation is that the maximum upside potential for EURUSD/ EURJPY is something like 1.3200-1.3300 for EURUSD and around 130-131 in EURJPY.
Another issue to watch out for in coming days and up to the G20 is the idea of international quantitative easing by the IMF. An article out in the Telegraph over the weekend talks about the concept of Special Drawing Rights, a way for the IMF to print currency for its bailout efforts. Printing presses of the world unite!
Tuesday
- Germany Mar. ZEW Survey - this survey of investor confidence has shown an interesting trend in recent months. While the "Current Situation" component continues to plummet to near record levels (essentially tracking the move in the equity indices in general as it always has), the expectations component has now rallied significantly from record lows below -60 and was at -5.8 in Feb. This suggests that investors think the economy is stabilizing. Is this justified?
- Canada Jan. Manufacturing Shipments - the December data point showed a -8% contraction in shipments. January is not likely to show much of an improvement as the worst part of the drop is associated with automotive parts and the tumbling US auto sales.
- US Feb. PPI - no doubt about it, headline inflation rates have come tumbling down with the fall in energy and food prices, but the year-on-year comparisons of core PPI have only barely started to show signs of topping out and are still at near 20-year highs. If deflation fears are to be justified, we would like to see the core pricing also beginning to fall sharply - so watch the core numbers rather than the attention grabbing negative headline numbers on this release.
- US Feb. Housing Starts and Building Permits - expecting news depths yet again. Housing Starts have fallen nearly 80% from their early 2006 peak.
Wednesday
- Japan BoJ Target Rate Announcement - no adjustment expected here as the focus has moved to relative degrees of quantitative easing in the world. So far, the BoJ has mostly only looked at supporting the corporate credit market and not moved toward the types of quantitative easing it has performed in the past (like debt monetization).
- UK BoE Minutes - the bank has moved aggressively into new unconventional territory in monetary policy and the minutes will help reveal what other measures might have been discussed.
- US CPI - unlike the core PPI, the core CPI has fallen rather sharply from its levels a year ago above 2.5% and is now about half that. The headline year-on-year comparisons are at 0% - the lowest level since the mid-1950's. The comparison of CPI and PPI trends suggest that corporations are getting squeezed by end demand falling more quickly than their cost pressures.
- US FOMC Rate Decision - no change to the 0-0.25% rate to be expected for a long time. The question shifts to the Fed's expectations on what nontraditional monetary easing tools it will grasp for next, with the hot-button issue of the moment on how close the Fed is coming to outright debt monetization. Some suspect it may be more in favor of it after the BoE's success in lowering rates after mounting its own debt monetization efforts. This is the key event risk of the week together with any new announcements from Geithner as US 10-year notes hover around the pivotal 3% level.
Thursday
- Switzerland Feb. Trade Balance
- Sweden Feb. Unemployment Rate
- Canada Feb. CPI
- US Weekly Initial Jobless Claims - the steady stream of weekly claims above 600K suggests that the US unemployment rate could continue to accelerate toward 10% by late this year or early next.
- US Philadelphia Fed - the US manufacturing surveys so far not showing signs of improvement, after the Empire number out today was out at a record low, suggesting an accelerated pace of worsening.
Friday
- EuroZone Jan. Industrial Production - the December number was -12.0% and the January number is expected to come in at worse than 015%
- Canada Jan. Retail Sales - expected to rebound/stabilize from the jaw-dropping deceleration in December
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