–ECB Bond Buying Will Not Be ‘Automatic’, Even With ESM Program

FRANKFURT (MNI) – Eurozone inflation is not a concern for monetary
policy now, as there are no signs yet of second-round effects from
rising oil prices, European Central Bank Governing Council member Luc
Coene said in an interview published Saturday with Belgian daily L’Echo.

“Inflation, which is due uniquely to the rise in petrol prices, is
not a problem. It will pass through the economy,” Coene told the paper.
“What is problematic are second-round inflation effects. But, up until
now, in what we have seen in the past, there have not been any
second-round effects.”

“Thus, the fact that petrol prices are rising presently in the
short term, which is anyway surprising since global demand isn’t rising,
does not immediately have an effect on inflation expectations or on our
monetary policy,” he said.

Coene stressed that any future ECB bond purchases would not be
automatic, even if the ESM rescue fund launches a bond-buying program
for a particular country. The ESM remains the “appropriate instrument”
for bringing down sovereign yields, he said, while any ECB bond buying
would be restricted to the shorter end of the yield curve.

“We created the ESM, which is the appropriate instrument to attack
this kind of problem. It is not central bank liquidity that will resolve
this problem,” Coene said.

“Once the ESM has decided to intervene in longer maturities, the
ECB could decide to intervene in shorter maturities to calm the markets.
But let us be clear: it will not be automatic. We will maintain our
freedom to act.”

Coene, who heads the Belgian central bank, said Belgium could yet
experience “slightly negative” growth this year. The outlook depends on
confidence in the wider Eurozone.

“It’s all a question of confidence: in as much as the European
Council can restore confidence through the decisions it takes, a
relatively quick recovery could take place,” Coene said.

For the moment, however Europe’s economy has turned sour, he said.
“It is clear that something is happening in the world economy, as well
as in the European economy, which is clearly evolving in a negative
direction.”

Coene said that Dexia bank may need to be recapitalized if it
cannot raise the capital it needs on its own.

“If market conditions do not allow Dexia to reduce its losses, a
recapitalization would certainly be necessary, and relatively quickly,”
Coene said.

Coene said if market conditions persist that there is a risk this
recapitalization would have to take place in the short term, rather than
the long term.

– Frankfurt bureau: +49 69 720 142; email: ccermak@marketnews.com –

[TOPICS: M$X$$$,M$$EC$,MGX$$$,MT$$$$,M$$CR$]

• Canada sheds 30,400 jobs in July; unemployment rate rises to 7.3% from 7.2%
• US import prices fall 0.6% in July
• Greek year-to date deficit through July EUR 13.2 bln versus target of EUR 14.8 bln: BBG
• US July budget deficit $69.6 bln versus $129.4 bln a year ago; some spending was pushed forward  into June by calendar, Treasury said
• S&P 500 rise 0.2% to 1405
• US 10 year note falls 4 bp to 1.66%

We ended Thursday’s trade just below 1.2300 and we end Friday’s session at the same levels. But we saw some rock and rill in between.

EUR/USD fell to test key support at the 1.2243 level, the 50% retracement of the recent corrective rally in EUR/USD from trend lows of 1.2042. We violated that level by a pip and a half and before long we rallied furiously, making a fresh session high at 1.2317 before finally stalling, capped by important resistance at 1.2325. A vague rumor that of a planned short-selling bank on European bonds may have been a catalyst though the talk was not wide spread.

Cable jumped even more sharply, rising like a rocket from 1.5575 to 1.5701 before relenting. It closes near 1.5670.

Commodity currencies trader with a firm note with the CAD a start performer today despite a weak Canadian employment report. M&A related demand for CAD remained rumored for a second day.  We end the week at the lows, around 0.9910. AUD closes at 1.0575.

Thanks for visiting this week and have a pleasant weekend.

By Denny Gulino

WASHINGTON (MNI) – Shortly after Labor Day the Office of Management
and Budget will give Congress a long list of specific exemptions to any
drastic “fiscal cliff” cutbacks, far more detailed than the broad
categories of Social Security, Medicaid and military paycheck exemptions
built into the process.

The report to Congress is mandated by the newest law on the books,
the Sequester Transparency Act President Obama signed Tuesday.

The report will not be designed to be reassuring. The more programs
and categories that are exempted from the so-called fiscal cliff, the
deeper will be the cuts for everything else.

In the spirit of the doomsday alternative with which Congress
threatened itself, the Obama administration report to Congress is
expected to make any sequester triggered on Jan. 2 even more unthinkable
than it is now, the better to force a compromise solution.

However, the administration has, at the same time, somewhat
softened what would otherwise be the guillotine effect of the cliff or
sequester, turning it into more of a fiscal ramp that only gradually
chokes government spending.

The Employment and Training Administration at the Labor Department
– the same office that this week ingloriously posted the sensitive
initial jobless claims data on its Web site more than 15 hours early —
issued guidance to federal contractors July 30 saying any cuts would
take at least four months to begin to take effect.

Saying government offices and agencies will need substantial time
to implement any sequester order, the Labor Department unit said federal
supervisors will have at least 120 days to make it happen. The “it” is
the removal of $1.2 trillion from spending.

Some analysts have said the actual cuts have to be about $200
billion less than that. And they saw the law specifies that 18% of the
remaining cuts somehow be cut out of the government’s interest payments
on the national debt, not spending programs that affect defense or
benefit payments. That doesn’t detract from the fact any sequester would
be the most severe and sudden budget cuts ever attempted.

Critics who don’t want any of the fiscal cliff threat pressure
relieved immediately pounced on Employment and Training, saying the real
motive for its guidance message is to forestall any 60-day notices of
layoffs going out to thousands of defense industry employees right
before the November election.

Any sequester cuts would be two-sided, equally divided between
defense and social safety net programs,

The courts may well defer to the Labor Department should advance
layoff notices or the lack them be challenged. The larger reality,
however, remains that the fiscal cliff continues to be one of the
biggest instances of fiscal and economic uncertainty Congress has ever
imposed on itself and the nation on purpose. According to the IMF, the
threat of economic instability would even reach to the entire global
financial system.

Until the Sept. 6 OMB report to Congress, no one in or out of
government can reliably estimate how much of a budget cut to expect,
even though most accounts have talked of possible 8% to 10% across the
board.

That was shot down by acting OMB Director Jeff Zients before the
House Armed Services Committee Aug. 1, when he pointed out any sequester
cutbacks would be occurring half way through the government’s fiscal
year, and so could be around 14%, not just 10%. The OMB is given much
discretion what to exempt and how to cut, but there could be appreciable
differences in how an Obama administration OMB would do the job compared
to a Romney administration OMB.

And technically, until the fiscal 2013 budget amounts are settled,
OMB cannot give exact cutback totals. With the six-month extension of
the 2012 budget numbers Congress has agreed to accept when it returns
from its current recess, intended to take a government shutdown off the
table while Congress argues about the sequester, the exact FY 2013
cutback figures will not be able to pinpointed with total accuracy.

All of which is beside the point for those budget hawks who are
pushing for a congressional compromise. For them it’s enough that the
sequester or fiscal cliff energize every interest group whose
constituents are threatened, so Congress will eventually be under
maximum pressure to do something.

But not right away. When the members of Congress return to Capitol
Hill from their long August vacation, it will be just in time to hear
that Sept. 6 report dramatizing the pain of any sequester. The report
will be the hook for furious partisan attack messages that will probably
clog the airwaves for a couple of weeks. And then, of course, Congress
will be leaving again for the election hiatus.

It’s after Election Day, according to the optimists on the issue,
and after the sobering news from the ballot box, will Congress finally
be ready to face up to the fiscal cliff’s implications.

Knowing what changes have been dictated by voters to take effect
in January on Capitol Hill, what political party will control what, and
who is in the White House next year, members of Congress will put aside
their campaign talking points and make serious, intelligent choices,
goes the theory.

Or, more realistically, they’ll deadlock, legislatively paralyzed,
and perhaps, in a last feeble effort of the year, try to vote to put off
the effects of the sequester until later. Whatever they do or don’t do,
according to the Labor Department, they’ll have four months to
reconsider.

As congressional historians point out, although sequestration was
invented as a budget control mechanism in the Gramm-Rudman-Hollings
Balanced Budget Act back in 1985, Congress since then has always found a
way to avoid any actual sequestration taking effect.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$]

The EURUSD peaked on Monday, equalled it on Tuesday and reached the low today.  The high to low trading range was 202 pips – not so great but the declines over the last two days helped to bring respectability to the action.  What was not pretty for the move was the flurry today that ripped the price back to the upside. Although the price peaked just in front of  the 200 hour MA (green line in the chart above at the 1.2319) and the 38.2% of the weeks range - keeping the bears  happy – it left a sour taste in the mouths of those expecting a continuation move lower today.   Such is a characteristic of the current trading environment, however.  You have to keep on your toes.

The subsequent move off the high this afternoon has come down to the June 1 2012 low at the 1.2286.   This level had a number of support and resistance tests at the level.  The market still remembers key levels and I expect this level to be important in next week’s trading. 

In addition to the 1.2286 level, traders will continue to  use the 200 hour MA and 38.2% as a level to define the bias from a technical perspective next week. With the price remaining below this level – coupled with the failure to take the flurry higher and make it more –  suggests that the move in the NY session today was more of a illiquid Friday/Olympic/Summer short covering rally than anything else    Buyers bought and stopped. There was no love and commitment in the move ; ).   

Looking at the daily chart, the price tested topside channel trend line resistance at the highs for the week and marched lower. The move to the lows on today’s bar is a bit disappointing as the price looks like it will close above the midpoint of the days range. In fact the last 3 days had corrective moves higher in the NY sessions – on Wednesday, the low was reached in the 9 AM hour, on Thursday the low was reached at 11 AM and today the low reached during the 9 AM hour.  Maybe that is why I felt the action was not fulfilling this week.  The market trended lower  in London and corrected in NY. 

Next week, the big economic statistics will come from German ZEW Economic sentiment on Tuesday, Flash GDP on Tuesday, EU CPI on Thursday. In the US Retail Sales on Tuesday, Capacity Utilization and Industrial Production on Wednesday and Univ of Michigan on Friday.

Speculative net positions compared to last week and the year ago via the CFTC’s commitments of traders report as of the close of business on Tuesday.

S&P down only a point in quiet trade after being down a bit less than 6 points earlier in the day.

EUR/USD is little moved but EUR/USD is being marked up as the day draws to a merciful close.

USD/JPY now is now at 78.28, EUR/USD at 1.2294.

So he says, to his home town paper..

As recently as May, Williams was saying he was not in favor of QE3. By June, he appeared to be leaning toward it. In an interview with the Financial Times in late July, he said that unless “further action” were taken, there would be a lack of progress toward employment, but stopped short of calling directly for a Fed move because of uncertainty surrounding the costs and benefits of a stimulus.

This week, he is for it. “It seems like if we have the tools to move us faster toward our goals, we should use them,” he said in the interview.

Williams called QE3 “a very big step. … The hurdle to taking this step is relatively high. In my view, we have reached that hurdle.”

And touts QE before the weekend…

What: The REBROADCAST of the Traders Course with Greg Michalowski
Where: If you missed it, you can watch the rebroadcast by going to: https://www1.gotomeeting.com/register/337083976
Topic: Defining Risk, Limiting Risk, Accepting Risk. Olympic Athletes do it. Why should you too?

Have a great weekend.

US DATA: July Tsy budget -$69.6b vs -$129.4b Jul’11, and there was about
an 11% or $93b improvement in FYTD12 (10 mos in). Since July 1 was a
Sunday some outlays were pushed into June; July also had one more
business day than last yr so receipts were up $6b as a result. Adjusting
for these, Jul’12 budget would have been only about $18b better, the
Treasury estimated. Tsy’s July budget included a $1.9b TARP repayment.
But overall receipts are up – FYTD individual taxes +4.2% and corp taxes
+30% – illustrating growth. Outlays are the main problem, falling only
about -1% yoy despite faster contraction in defense spending.

• Much lower than expected
• Consensus $103B
• Outlays shifted to June rather than July

Quoted in a book on the stimulus as pushing back at his aides, who wanted more spending:

P. 338, Obama tells his team to stop bugging him to make stimulus speeches. “Look, I get the Keynesian thing. But it’s not where the electorate is.”

 

Hard to imagine there’s a lot of incentive to make much of a move on a summer Friday afternoon absent a tape-bomb of some sort but this morning’s price action indicates that anything is possible.

Unless we clear important resistance at 1.2325 look for dull range trade for the balance of the session (lord willing).

We’re finally hearing the first semi-plausible thread of a reason for the EUR/USD pop…There was apparently a rumor doing the rounds of a short selling ban on European bonds.

Take it for what its worth…not very much at this stage now that the damage has been done.

EUR/USD now at 1.2300 after stalling ahead of the important 1.2325 area. Stop loss buy orders lie above that level.

The WSJ reports that the Finnish PM says the ESM should not buy secondary market debt, that eurogroup will not be issuing eurobonds and that the ECB should not buy bonds.

The only twist in the comments is that the market expects the ESM to buy primary issuance of European bonds, not bonds trading in the secondary market. That was supposed to be the ECB’s role, in Draghi’s framework.

London, Aug 10 (MNI) – The following are highlights of forecasts
for upcoming U.K. economic indicators and events.

————————————————————————

Tuesday, Aug 14

Prior Median

0830/0430 UK Jul Consumer Prices

0830/0430 UK Jul CPI (%m/m) -0.4 -0.1
0830/0430 UK Jul CPI (%y/y) 2.4 2.3
0830/0430 UK Jul Core CPI (%m/m) -0.3 -0.1
0830/0430 UK Jul Core CPI (%y/y) 2.1 2.1
0830/0430 UK Jul RPI (%m/m) -0.2 -0.3
0830/0430 UK Jul RPI (%y/y) 2.8 2.7
0830/0430 UK Jul RPI-X (%y/y) 2.8 2.8

Headline CPI fell sharply to hit 2.4% in June and in this month’s
Inflation Report the Bank of England’s Monetary Policy Committee
forecast it would decline further this year.

July, however, is expected to see only a small fall in the headline
yearly CPI rate. Some disinflationary effects seen in June, particularly
the heavy, early summer discounting in the clothing sector, won’t be
repeated in July.

1500/1100 UK BOE Gives Size of Aug 15 ECTR stg bln

The Extended Collateral Term Repo facility, the BOE’s emergency
liquidity facility, has got off to a slow start with only the minimum
Stg5 billion offered in the first two monthly auctions.

It was launched when fears were high that some of the worst
Eurozone risks may materialize but the backstop facility has seen weak
demand so far. The July auction did not even manage a full allotment,
with banks taking Stg4.175 billion at the minimum clearing spread of 25
basis points over the 0.5% Bank Rate.

Another Stg5 billion auction looks very likely this month.

————————————————————————

Wednesday, Aug 15

Prior Median

0830/0430 UK Aug BOE MPC Minutes

0830/0430 UK Aug BOE MPC Vote Extend QE 7 0
0830/0430 UK Aug BOE MPC Vote No Change Bank Rate 9 9
0830/0430 UK Aug BOE MPC Vote No Change QE 2 9

The key points of the August Monetary Policy Committee meeting were
spelled out in this month’s Inflation Report and by Governor Mervyn King
at the subsequent press conference on Wednesday.

Although the growth outlook had deteriorated and inflation was
expected to head below target the BOE’s flagship credit easing
initiative, the Funding for Lending Scheme, only became active in August
and the MPC had sanctioned fresh QE in July. The committee wanted more
time to assess the impact of these latest stimulus measures.

“When we met last week, we had already put in place an additional
set of asset purchases, another 50 billion and the Funding for Lending
Scheme is only a week old today. So I think we do need a bit of time to
see how they will work,” King said.

It is possible one or two of the most dovish members, Adam Posen
at his final meeting or David Miles, may have voted for extra QE but a
unanimous vote for unchanged policy is widely reckoned to be the most
likely outcome.

Prior Median

0830/0430 UK Aug Labour Force Survey

0830/0430 UK Jul Claimant Count (000s) 6.1 7.0
0830/0430 UK Jul Claimant Count rate (%) 4.9 4.9
0830/0430 UK Jun Average Weekly Earnings 1.5 1.8
0830/0430 UK Jun Average Wk Earnings: Regular Pay 1.8 1.9
0830/0430 UK Jun ILO Unemployment Rate (%3m) 8.1 8.1

Markit’s KPMG/REC labour market survey, which has the closest with
the official employment data with a 3-4 month lag, suggests the June
data should show a broadly stable jobs market. The Bank of England’s
Agents Reports have also found little change in employment intentions.

While employment may hold up, claimant count unemployment is
expected to rise, in part because of a change to the benefit system with
some recipients being forced from income support and on to the jobless
column.

1030/0630 UK BOE Results of ECTR

The allotment and clearing rate are announced (please see the
Tuesday entry).

————————————————————————

Thursday, Aug 16

Prior Median

0830/0430 UK July Retail Sales

0830/0430 UK Jul Retail Sales Total (%m/m) 0.1 -0.2
0830/0430 UK Jul Retail Sales Total (%y/y) 1.6 1.4
0830/0430 UK Jul Retail Sales ex-fuel (%m/m) 0.3 -0.1
0830/0430 UK Jul Retail Sales ex-fuel (%y/y) 2.2 2.1

Food sales in June were hit by the exceptionally wet weather, with
the start of the barbecue season a washout, but non-food sales were up
1.2% on the month, boosted by heaving early summer discounting in
clothing and footwear.

A clear downside risk is that there will be no repeat of the
clothing and footwear boost and the early discounting may have simply
brought sales forward a month.

The Olympic effect right at the end of July, and the wet weather at
the start, add to the uncertainty.

————————————————————————

For further information contact David Robinson on 4420 7862 7491;
e-mail: drobinson@marketnews.com.

[TOPICS: MABDS$,MTABLE]

–Bank of Turkey Director Defends Measures to Address Capital Inflows

By Daniel Horch

SAO PAULO (MNI) – The European Central Bank’s bond buybacks have
helped markets, but winning back investor confidence will require fiscal
steps as well, Bank of Finland director Jouko Vilmunen said Friday.

He said, the various liquidity and support measures taken both by
European Union and the European Central Bank “have had stabilizing
effects in sovereign bond markets in Europe.”

The Sovereign Markets Programme, was a bond buyback in May 2010,
though the ECB only spent 210 million euros and two German policymakers
resigned over it, perhaps limiting its impact.

The “liquidity support measures as well as the covered bond
purchase program has not generally affected the long bond yield spreads,
whereas bonds markets seem to have responded strongly to the ECB’s SMP.”

But he said market reactions showed “It is not enough to provide
liquidity. To win investor confidence, you need credible fiscal policy
reform.”

Vilmunen spoke in Sao Paulo at the Brazil Central Bank seventh
annual seminar on risks and financial stability, where he presented a
paper he had coauthored on the effect of recent European crisis
resolution policies on the bond yields of troubled Eurozone countries.

He specified that reforms must be long-term and structural, as even
major spending cuts are not enough, if investors are not convinced they
will be sustained.

Bank of Turkey board member Ahmet Faruk Aysan told the seminar how
emerging economies can respond to excessive capital inflows that can
cause currency volatility, excessive credit growth, and inflation.

Aysan presented two options: capital flow measures to restrict
inflows while interest rates are tightened, as Brazil and South Korea
implemented in 2010 and 2011; or Turkey’s response, which was “to use
macroprudential measures to restrict domestic credit and demand while
keeping the short-term interest differential as low as possible.”‘

He summed up Turkey’s policy as “a lower policy rate, a wider
interest rate corridor, and higher reserve requirements” and noted that
through August 2011 macroprudential tightening was the Bank of Turkey’s
primary response.

Starting October 2011, when inflation worsened, the Bank of Turkey
moved to monetary policy tightening, he said.

Aysan unsurprisingly called Turkey’s experience a success, but
graciously told his Brazilian hosts that Turkish policymakers were
following Brazil’s policies closely and different measures are suitable
for different countries.

** MNI – Sao Paulo **

[TOPICS: M$X$$$,MI$$$$,M$$EC$,M$T$$$]

 

The days range has now been fully retraced in the EURUSD and is making new highs for the day.  An hour ago the extension of the days range was occurring at and below the 61.8% of the months trading range (see chart above). Now that extension is above the highs. Such is the up and down market we trade in.   

Where is the next target above?  The 200 hour MA at the 1.2318 level is the next stop followed by 1.2324 and 1.2342 trend line. The range for the day is still 75 pips or so.  The average over the last 20 trading days is 124 pips.  So there is still room for more.  Where does this move become totally bogus?  Eyebrows get raised below 1.2296 and “I give ups” come in on a move back below  the 1.2278 level.

That was important support on the way down and will be pivotal on the way back up, if over taken.

So far we’ve managed to break the overnight high at 1.2308 and trigger stops as high as 1.2317.

–2012 GDP Projection Revised Down To 2.2% Vs 2.3%; 2013 2.1% Vs 2.7%
–Expect Q3 Real GDP to Grow 1.6% Vs 2.5%; Q4 2.2% Vs 2.6%
–Panelists Trim Employment Forecasts
–Forecasters See Higher Risk Of Contraction For Next 4 Quarters

By Yali N’Diaye

WASHINGTON (MNI) – A Philadelphia Fed survey published Friday
showed respondents lowered growth and employment expectations for the
next few years, while seeing higher risk of a negative GDP in any of the
next four quarters.

In line with a bleaker economic outlook, projections for inflation
were revised down, according to the Philadelphia Federal Reserve’s third
quarter survey of 48 professional forecasters.

Forecasters now see the real GDP grow at a pace of 1.6% in the
third quarter of this year, revised down from 2.5% in the previous
survey. The growth pace for 4Q12 was revised down to 2.2% from 2.6%.

For 2013, the growth pace is now seen at 1.8% in the first quarter
vs. 2.6%, and at 2.3% in the second quarter, revised down from 2.7%. The
initial forecast for the third quarter is 2.5%.

On average, annual GDP growth is seen at 2.2% in 2013 (vs. 2.3%),
2.1% in 2013 (vs. 2.7%), 2.7% in 2014 (vs. 3.1%) and 3.1% in 2015 (vs.
3.4%).

In addition to lowering their growth expectations, “The forecasters
have revised upward the chance of a contraction in real GDP in any of
the next four quarters,” the report said, with a peak seen in the risk
of contraction seen in the first quarter of next year.

The risk of a negative quarter in 3Q 2012 was revised up to 13.8%
from 12.2%. It is now seen at 17.0% for 4Q (vs. 14.5%), 21.2% for 1Q
2013 (vs. 17.3%) and 21.0% for 2Q 2013 (vs. 17.8%). The risk is seen
diminishing further in 3Q 2013 to 19.1%.

Against this backdrop, forecasters also downgraded the outlook for
employment growth, seeing the pace of job creation at 125,000 per month
in 3Q 2012 (vs 170,000/month), 135,300 per month in 4Q 2012 (vs.
172,600), 151,700 per month in 1Q 2013 (vs. 170,300) and 139,700 for 2Q
2013 (vs. 185,800). Forecasters expect a pickup to 149,000 per month in
3Q 2013.

The average is seen at 154,600 this year and 143,200 next year,
revised down from 171,900 and 175,700, respectively.

The unemployment rate is see slowly improving to 7.8% in 3Q 2013
from 8.2% in 3Q 2012, with upward revisions ranging from 0.1 to 0.2
point.

On average, the unemployment rate is seen improving to 7.0% in 2015
from 8.2% this year, with upward revisions to every year, including in
2015, when it is no longer seen below 7%.

The bleaker growth and employment prospects also translated into
inflation forecasts, although the results for long-term expectations
were “mixed.”

The downward revision to headline average CPI for 3Q 2012 was
particularly sharp: +1.5% compared with +2.3% in the previous survey.

On the other hand, core CPI was revised up to +2.2% from +2.0% for
3Q 2012.

The pattern was similar for headline PCE inflation and core PCE
inflation, seen at +1.5% (vs. 1.9%) and +1.9% (vs. +1.7%), respectively
in 3Q 2012.

Headline CPI is seen rising to 2.2% in 3Q 2013, with 0.1 point
downward revisions for each quarter through 2Q 2013.

Core CPI, on the other hand, is seen slowly declining to 2.0% in 4Q
2012 where it is expected to stay through 2Q 2013.

Over the next 10 years, 2012 through 2021, headline CPI inflation
is seen averaging 2.35%, lower than the 2.48% expected three months ago.
However, the corresponding estimate for headline PCE inflation is
unchanged at 2.20%.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,MAUDS$]