Euro Dips As ECB And Bundesbank Check OMT Legality

Financial markets are mostly staying in consolidation But Euro is notably weaker against other currencies on news that ECB and Bundesbank are both checking legality of the OMT bond buying program. A German news paper tabloid Bild reported that Bundesbank could challenge the program and bring the issue to European Court of Justice as it could violate the treaties for direct financing of state deficits. ECB president Draghi has repeatedly said that the ECB acts within its mandate as skyrocketing yields of sovereign bonds in some Eurozone countries affected transmission of monetary policies. The OMT plan already had a drastic impact on the markets and brought Spanish 10 year yield comfortably below 6% level after its announcement, even though it haven't been kicked start yet. Bundesbank president Weidmann was the sole dissenter of the OMT and was out-voted by other policy makers. So far, Euro's loss against dollar and yen are relatively limited, but outlook in EUR/GBP does favor deeper selloff in the cross.

Elsewhere in Europe, German seemed to have got more and more impatient with Spain with a government official stating that Spanish Prime Minister Mariano Rajoy should "stop prevaricating and decide whether Spain needs a full rescue". Michael Meister, finance spokesman for Merkel’s Christian Democratic Union, urged Rajoy to "spell out what the situation is". He also said that "Rajoy evidently has a communications problem. If he needs help he must say so". The latest data showed that Portugal’s tax revenue dropped -2.4% in first 8 months of the year, compared to the same period last year, due to unemployment. Prime Minister Pedro Passos Coelho said he is ready to announce a new proposal to increase workers' social security contributions while cutting corporate taxes. He stated that in order to meet the budget target, "income tax will be the main way of achieving it". However, this has triggered a lot of dissatisfaction and protests were seen on the street.

S.F. Fed's Take On QE3
In U.S., San Francisco Fed Williams said that the current QE3 program, unlike past asset-purchase programs, "doesn't have a preset expiration date". Such a program is "explicitly linked to what happens with the economy.” While the current $40b a month QE program is focused on MBS, Williams said that Fed might expand the purchases to "include other assets". Williams saw the so-called "fiscal cliff" a bigger threat to the US economy then Eurozone for the moment and he doesn't expect the tax hikes and spending cuts to take place as scheduled and will "slow our economy's forward progress". Williams expect US GDP to grow 1.75% in 2012 and accelerates to 2.5% in 2013 and 3.25% in 2014. But unemployment rate is expected to drop slowly to 7.25% by end of 2014. Note that some other Fed officials hinted that Fed would stop the open-ended purchase only when unemployment is back at 5-6% level.

On the data front, Japan corporate service price index dropped -0.3% yoy in August. China conference board leading indicator rose 1.7% in August. German Gfk consumer sentiment was unchanged at 5.9 in October. Swiss UBS consumption indicator dropped to 1.03 in August. Canadian retail sales, US hour prices and consumer confidence are the main feature today.