Recap 7-25-12

NB: I will be going on a much needed holiday. Updates will resume in 2 weeks.

Main Items:

  • The ECB’s Nowotny on giving the ESM a banking license: “I think there are pro arguments for this… There are also other arguments, but I would see this as an ongoing discussion.” He added that he is “not aware of specific discussions within the ECB at this point.”
  • Partial transcript from UPS call:
    we think current second-half economic forecasts for the US are too high and that GDP growth will likely be closer to 1%…. we see concerning trends in our US domestic segment…… Historically global exports grow at a higher rate than GDP. This is not the case today. In fact, global trade is lagging GDP. This has only occurred once in the past 10 years and that was during the last recession.”
  • US New Home sales dropped to 350k in June vs 372k exp and 382k prev. There may be some odd statistical effects, however, as Sales in the Northeast dropped 40% after rising for 6 months.


  • German IFO Business Climate declined to 103.3 in July vs 104.5 exp and 105.3 prev
  • ECB Bank Loan Officer Survey showed that roughly 10% of respondents reported tightening lending standards on a net basis in early July, with almost all the tightening responses located outside of Germany. The net figure is roughly unchanged from Q1. Loan demand continued to be weak, -25% on net vs -30% in Q1. 41% of respondents reported a decline in risk weighted assets over the past 6m, with 31% expecting a further decrease.
  • UK GDP declined -0.7% QoQ in 2Q vs -0.2% exp and -0.3% prev
  • Australia CPI declined to 1.2% YoY in 2Q vs 1.3% exp and 1.6% prev. However, trimmed mean measures remained near 2%.

Upcoming Data:

  • Wed: German IFO, UK GDP,
  • Thurs: US DGO, Jobless Claims, Pending Home Sales, Japan CPI
  • Fri: German CPI, US DGP, UMichigan Confidence

Commentary & Links:

Per the FT: “senior officials say no such plan is in the offing and several key European decision makers have already left for the summer holiday, with no immediate plans to return.” The lack of response from EU politicians suggests that Spain will be on its own for a while. However, it also suggests that the officials believe that Spain’s liquidity conditions are sufficient for the next few weeks. Presumably, the officials expect that the approved Spanish bank bailout funds will go toward supporting the Spanish bond market. Only time will tell whether it will be sufficient, given that multiple Spanish regional governments need help as well. Another possibility that market participants are now expecting is some mechanism that allows the ESM/EFSF to access ECB liquidity. IMO, a banking license still does not appear likely. If needed, the ESM can repo its holdings of Spanish debt via other EU banks, who then can repo via the ECB. In that case, the ESM can get broadly similar levels of leverage, while the ECB is protected by the EU bank in the middle. Finally, JPM suggested that the ECB could help by buying ESM debt directly. While true, it’s not clear if that will help much. The high ratings for ESM and the flight to quality suggests that private demand for ESM debt would be more than sufficient to cover the likely issuance. ECB purchases would only make sense if ESM demand is weak.

Separately, going long gold seems to be a popular trade before probable Central bank action next week. But Central bank action over the past couple months have had a minimal effect on gold prices. It’s possible that the market views the ECB’s refi rate cut and the Fed’s extension of Operation Twist as fairly minor easing actions. But in that case, it’s not clear if the ECB and Fed meetings next week will be much stronger. The ECB has indicated that additional LTRO’s may not help much given banking capital constraints, and Bernanke does not appear ready yet to embark on another round of purchases, given his Humphrey-Hawkins testimony as well as the fact that Operation Twist was just extended at the last meeting, and to year end, which suggests that the FOMC does not foresee a rapid deterioration as the central outcome. Furthermore, given the low risk free rates, there is the argument that monetary policy has nearly exhausted its ability to further stimulate the economy. If so, that removes another rationale for buying gold. As a result, perhaps a gold rally into the ECB & Fed meetings next week should be faded.


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