News Points

  • Spain’s deficit for 2011 was revised up from 8.5% to 8.9%.
  • Markets have had a little bounce after Wen said China should adopt a “proactive fiscal policy and a prudent monetary policy”.
  • Boris Tadic lost the Serbian presidential election to Tomislav Nikolic, a nationalist who argues for closer ties with Russia. Serbia has been implementing fiscal austerity as part of its drive to join the EU. It achieved candidate status in March. Nikolic said that Serbia would continue on its EU path. He may face an opposition-controlled parliament, two parties who oppose him having received enough seats to form a coalition.
  • Bloomberg reports that ND and SYRIZA are vying for first place in the latest Greek opinion polls, without citing any numbers. Since ND is presently the largest party, I cannot see that another ND “victory” would change anything. The important point is that ND’s only available “business-as-usual” partner, PASOK, continues to lose support.
  • The Chicago Board of Trade, Kansas City Board of Trade and Minneapolis Grain Exchange have all moved to longer electronic trading hours in response to ICE’s launch of grain futures. This is another blow against pit trading, an anachronistic trading method that is still available during a short period each day. 93% of CBOT volume was electronic last year, according to Bloomberg.

Quantitative Easing

Why is everybody talking about quantitative easing in the US? I suppose because the Fed has continued to talk about the possibility of more stimulus. But in what sense would QE actually provide any stimulus? I think that the most important channel for QE has been the expectations channel. QE signals that a) interest rates will not increase soon and b) the Fed will fight deflation. But with breakeven inflation still above 2% at the ten-year point and not far below at the five-year point, CPI inflation above 2% and the PCE deflator above the 2% target, the argument for extraordinary action to prevent deflation seems pretty weak. What is more, there is little argument for a signal that interest rates are going to remain low, given that the Fed’s new communication policy has already pushed Treasury (and corporate-borrowing and mortgage) rates to long-term lows. What would be the point of more QE?

I do think that QE has a money-flow effect. When the central bank purchases bonds in exchange for cash, a proportion of those bonds’ previous owners (I suspect a large majority) will reinvest the cash in some other asset class — corporate bonds, equities, or whatever. This means that QE provides what one might imagine as a physical support for financial markets. Will the Fed be so concerned about falling equity prices and widening bond spreads that it will do another round of QE just to raise the prices of financial assets? I am not so sure. It makes sense for the Fed to talk about the possibility — “QE is off the table” is the kind of phrase that gets the markets upset — but I suspect that the bar for further QE is quite high.

European Flexibility

On Thursday I mentioned the idea of the ESM lending directly to Spanish banks. Today the FT reports that this is one of a package of measures being put together by unspecified European authorities (presumably the European Commission — why do journalists have such trouble reporting on the actions of European institutions?). I don’t feel able to take the credit, since the idea 1) is obvious and 2) has been floated before. Eurozone bonds are also on the agenda. With the election of Mr Hollande in France and Messrs Barroso and Monti in favour of such measures, Angela Merkel may find it increasingly uncomfortable to hold out against them.

Paulson Wrong

On 18th April I said: “Incidentally I see that John Paulson is shorting German government bonds… I do not like this trade… On the other hand, I might like a trade in German corporate CDS as a play on a deterioration in the Eurozone economy.” Paulson’s trade struck me as armchair macro — it was a bet on how conservatively-minded Americans think the markets ought to behave (higher bond yields for governments with more debt) rather than on how they actually do behave. German corporate CDS spreads (as proxied by Siemens) have indeed blown out, although I didn’t do the trade (I am not big enough, and the risk-reward did not make it suitable for the main fund). One day I hope to have a large fund in which I can do more with CDS.


  • Initial claims 370k a.e.
  • Philly Fed -5.8 d.e. and fell below zero.
  • UK Rightmove house price index showed its third month of gains.

This Week

  • UK CPI (Tue)
  • UK public sector net borrowing (Tue)
  • US existing home sales (Tue)
  • BoJ rate and statement (Wed)
  • UK MPC minutes (Wed)
  • UK retail sales (Wed)
  • US new home sales (Wed)
  • Flash PMI’s (Eurozone and China) (Thu)
  • German Ifo business climate (Thu)
  • UK revised GDP (Thu)
  • US durable goods orders (Thu)