Recap 11-16-11

Main Items:

• Merkel said that Germany is ready to give up a piece of National Sovereignty to the EU
• Reuters reports the ECB is being asked to widen the range of collateral it accepts for its repos. Apparently it is UniCredit. The CEO is in a meeting with the ECB asking for more access to funding.
• The Washington Post said the super committee is on the brink and the White House is preparing for failure. Politico said no deal is in sight and it increasingly looks like one may not be reached. If it fails, automatic spending cuts of $1.2 trillion will kick in and the US may face a credit rating downgrade.
• US Core CPI increased to 2.1% YoY in Oct as exp vs 2.0% prev. The headline measure declined sharply to 3.5% in Oct vs 3.7% exp and 3.9% prev
• NAHB sentiment rose to 20 in Nov vs 18 exp and 17 prev.
• WSJ reports that LCH Clearnet last week finished unloading MF Global’s Eurozone debt holdings (WSJ)
• Banks in Europe are undercutting regulators’ demands that they boost capital by declaring assets they hold less risky today than they were yesterday. – BBG

Overseas:

• The BoE’s quarterly inflation report was very dovish. Additional QE is almost certain. Projections:

1. 65-70% probability inflation will be below target in two years. 60% probability for 3 years out.
2. Strong chance growth rates will be below 1% throughout 2012.

UK ILO UE rate increased to 8.3% in Sept vs 8.2% exp and 8.1% prev. Jobless Claims declined to 5.3k in Oct vs 21k exp and 17.5k prev

EU Core CPI was unchanged at 1.6% in Oct as exp

Commentary:

The BoE will do additional QE, but presumably they won’t go until the current round of purchases end next Feb. As a result, Gilts are likely to trade in a broad range until Jan. As a result, buying on dips looks like a reasonable strategy. It’s not yet clear what consensus expectations are for the size of the next QE program, but a prior BoE Quarterly Bulletin estimated that a 200bn QE program was equivalent to a 150-300bp cut, while a 100bp cut increases CPI inflation by ~0.5% over 18-24 months. With 2yr CPI forecasts @ 1.3%, this implies another ~100bn in purchases.

Separately, A US super committee failure is bullish for gold, despite the draconian cuts, because the deflationary effects will be overwhelmed by additional Fed QE. With real growth over the past 8 quarters averaging just 2.5% annualized (roughly in line with general FOMC estimates for 2012) and estimated GDP drag from the spending cuts of 1.5-2%, the US would be very close to a recession in 2012, even before any shocks from the EU. This outlook is likely to force the Fed’s hand, which is likely to move at the end of Q1, IMO, or if either core CPI peaks or 5y5y inflation breakevens fall.
Finally, note that essentially every major Central Bank in the world is now in easing mode, at a time when global commodity stockpiles remain very tight. Furthermore, positioning remains light, as evidenced by speculative positioning data, as well as media reports that Paulson has finished reducing his GLD stake. This is more or less the ideal backdrop for a precious metals rally.