The market was frantically snapping up risk in anticipation of the Fed warming up the printing presses on the latest official and unofficial Fed rhetoric. Will Bernanke pour fuel on the fire or is the market getting ahead of itself?
After yesterday’s Hilsenrath article (and despite a fairly non-committal ECB) and then last night’s rhetoric from known FOMC Board of Governor member Yellen last night, the market remains in a frenzy of anticipation over the prospects for further Fed easing and that some deal in the works to keep Spanish banks liquid for at least a little while longer will have us ascending another rung on the ladder to market nirvana (yes, that is sarcasm you detect...).
Last night,Yellen spelled out the worries that the employment market “seems to have stalled” and frets the downside risks that include the expiry of the Bush-era tax cuts at the end of the year. In this light, Yellen stated that “it may well be appropriate to insure against adverse shocks that could push the economy into territory where self-reinforcing downward spiral of economic weakness would be difficult to arrest.”
And how can we blame the market’s moves here? We’ve all been trained so well, after all, right? Remember early 2009? Remember Jackson Hole August 2010? Remember last year’s Operation Twist announcement followed by the ECB’s LTRO’s?
The question is how long the market can continue to chase its tail in celebration of liquidity measures before something “breaks” and whether the economic cycle is moving far swifter than the latest central bank actions and whether those actions can induce the same pickup in activity that they have in the past.
The other more immediate question is what Bernanke will deliver as he is out speaking almost as we are writing this.
BoE and UK Services PMI
The Bank of England made no move, which was the overwhelming consensus, yet EURGBP managed to react with a sell-off after yesterday’s bizarre two-way action before and after the ECB meeting. The reaction was perhaps partly in response to the stronger than expected PMI services reading from the UK, which surprised to the high side at 53.3 and contrasts nicely with the continent’s 46.7 reading from earlier this week. The 55-day movig average around 0.8130 looks like the technical resistance for the moment.
Odds and ends
Switzerland’s foreign currency reserves jumped a stunning CHF 70 billion in May, one of the largest accumulations of currency in the SNB’s long record of fighting CHF strength since 2009. This makes sense in light of the Euro Zone crisis, but it is alarming to think that Switzerland has accumulated in the neighborhood of 13% of GDP in reserves in a single month. There are stories of cars full of francs leaving the country and if this rate of accumulation keeps up, capital controls will be an inevitability sooner rather than later.
Looking ahead
We close the week with April trade data for Australia and Japan tonight and the RBA’s Stevens is also out speaking in Asian hours. Tomorrow we’ve got Swedish house prices for May on tap, as the house price trend may finally be indicating a coming unwinding of an epic housing bubble there. We’ve also got UK PPI data, US and Canadian trade data for April and the May employment report for Canada.
Most interestingly, tomorrow tells us whether we close this week’s risk rally with an exclamation point or if we get enough of a reversal to give the bears a chance next week. Stay tuned and stay very careful out there!
Economic Data Highlights
- Switzerland May Unemployment Rate out at 3.2% vs. 3.1% expected and 3.2% in Apr.
- Switzerland May Foreign Currency Reserves out at CHF 303.8B vs. 237.6B in Apr.
- UK May Halifax House Prices rose +0.5% MoM as expected and vs. -2.3% MoM in Apr.
- Switzerland May CPI out at 0.0% MoM and -1.0% YoY as expected and vs. -1.0% YoY in Apr.
- Norway Apr. Industrial Product Manufacturing out at +1.1% MoM and +1.9% YoY vs. -0.7% YoY in Mar.
- UK May Services PMI out at 53.3 vs. 52.4 expected and 53.3 in Apr.
- UK Bank of England left interest rate and Asset Purchase Target unchanged as expected
- US Weekly Initial Jobless Claims out at 377k vs. 378k expected and 389k last week
- US Weekly Continuing Claims out at 3293k vs. 3250k expected and vs. 3259k las week
- US Weekly Bloomberg Consumer Comfort Index out at -37.6 vs. -39.3 last week