• Mr. Jordan of the SNB has said that the CHF ceiling remains essential to safeguarding the economy. The ceiling is very credible.
  • The German SPD has called a meeting of 200 party members for 27 Sep to discuss a coalition with the CDU. Polls suggest that the public favours a grand coalition. Mr. Steinbruek has previously said that he would not serve in a coalition government, and the party membership is sceptical, but other SPD grandees will be tempted by ministerial appointments. The only other alternative for Mrs. Merkel is a coalition with the Greens (nobody will form a government with the Left Party). According to Quentin Peel, writing in the FT in 2012, the CDU and Greens have a long-standing mutual distrust, and their two attempted alliances in Hamburg and Saarland ended in collapse; but, on the other hand, they likely agree on the major issues of nuclear power, fiscal discipline and European integration and the Greens have recently elected a centrist co-leader.
  • Mr. Draghi said that the ECB was “ready to use any instrument, including another LTRO if needed, to maintain the short term money markets” at the desired rate. This is in response to the decline in excess liquidity in the financial system owing to the repayment of LTROs, and attendant fears of an increase in funding rates.
  • Messrs. Dudley, Fisher and Lockhart gave speeches. Dudley said that more evidence of a pick-up in the economy’s forward momentum would be required for him to support tapering. Fisher said that the Fed had harmed the credibility of its communications by deciding not to taper. Lockhart highlighted the negative implications of slowing payroll gains and falling labour-force participation. Dudley’s assessment that the economy is still weak and fiscal and monetary tightening offset improving economic fundamentals are in line with my own views. It would be consistent with these views to see the US equity market as being at too high a level.
  • Mr. Broadbent of the Bank of England said that forward guidance should be interpreted as a commitment to keep monetary policy loose as long as the economy required it — in other words, it should be seen as giving information about the BoE’s reaction function rather than as a commitment to keep rates low. It seems the BoE has failed to understand the lessons of the Fed’s forward guidance. Rates fell in the US after the forward guidance was issued because markets took it as a commitment. Further, the BoE was already seen by the markets as very doveish, so further information about its doveishness should not be expected to have an effect. With the short-term nominal rate effectively at its lower bound, central banks should be seeking to reduce real interest rates by flattening the nominal curve and raising inflation expectations. To do that, they should go as far as politically possible towards pre-committing to keep rates low.


  • HSBC China flash PMI: 51.2. A big jump!
  • Eurozone flash PMI 51.1 d.e. and fell, but still around the highest since mid-2011.
  • Eurozone services flash PMI 52.1 b.e. and rose to the highest level since mid-2011.
  • US flash PMI 52.8 d.e. and fell.

Coming Up:

  • Case-Shiller
  • CB consumer confidence