ECB Shifts To Easing Bias

Author : Victoria Marklew
From SafeHaven, Oct 2, 2008

For the first time in over five years the European Central Bank (ECB) today shifted its bias toward easing. In his subsequent comments, President Trichet stated that the ECB had "no bias" regarding future monetary policy moves, and refused to be drawn on the likelihood of a lower refi rate before year's end. However, the Council reportedly discussed only two options: leaving rates unchanged or easing. The focus of the Council statement was on the negative impact of the ongoing financial market turmoil. Trichet also pointed to clear evidence of a weakening Euro-zone economy as domestic demand contracts and financing conditions tighten. He stated that lower oil prices and ongoing growth in emerging economies "might support a gradual recovery in the course of 2009" - which is a distinctly more pessimistic assessment than he was making in early September.

Chart 1
Trichet's inflation forecast also shifted somewhat this month, from seeing the annual rate fall back to the 2.0% target "in the course of 2010" to anticipating price stability "at the beginning of 2010." He did reiterate that, while weakening demand diminishes upside risks to price stability, "they have not disappeared." Nevertheless, the overall tone of his press conference was decidedly dovish. The euro promptly fell against the US$ on expectations of a 25bps cut to the refi rate at the November 6 policy meeting. Interestingly, the Council and President also appeared to set the stage today for participation in a coordinated action with other central banks before then. With money market tensions still worsening despite massive central bank liquidity injections, rates at ECB auctions pushed to record highs, and Euro-zone economic data increasingly gloomy, the refi rate will very likely be 4.00% before the end of this year, and head still lower through the first half of 2009.

Victoria Marklew
The Northern Trust Company
Economic Research Department
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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This Time It's Different

Author: Jeff Pierce, Zentrader.Ca, Oct 3, 2008

Now I don’t mean that in the traditional sense that this bear market is somehow different from previous bear markets, but the Vix is definitely acting different from previous spikes. Actually it’s behaving more like a momentum stock than a unbounded oscillator as it’s refusing to revert back to it’s mean as it has with previous spike highs.

What does this all mean? With each wild day we have on the markets it beginning to look like we may be getting closer to a significant turning point in these markets. I can’t really say I know what’s going to happen at that turning point, but I’m quite certain it’s one of those instances that you’ll know it when it gets here.


The $CPCE still has complacency as there hasn’t been a rush to buy massive amounts of puts as there has been at previous cycle tops. I would assume with the big moves we’re having these days that this should see new highs before this is all said and done.

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NASDAQ Technical Picture - Lower Low

From Wall St. Warrior, Oct 2, 2008 10:25 pm



After two inside days, the markets gapped lower despite the SEC temporarily extending its ban on the short selling of certain stocks and the Senate handily passing a financial rescue package, as there is still uncertainty whether the plan will win approval from the House. Adding to the negativity, initial claims were higher than expected and short term borrowing rates and spreads (LIBOR, LIBOR-OIS spread) continued to climb. Today's sell off was broad based with gold, oil, and commodities pacing the way lower.

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Federal Reserve Bank Credit Balance Swells

From Econompic Data, Oct 3, 2008 05:03 am



Source: Federal Reserve

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Please Note!
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The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks

From Jesse's Café Américain, Oct 3, 2008 08:00 pm


Dollar Assets and Liabilities in the International Banking System

In reading the Assets and Liabilities reports of the Bank for International Settlements (BIS), we have been examining the holdings of the reporting banks with respect to the changes in US dollar denominated assets and liabilities.

The Eurodollar had been a component of M3 and was discontinued by the Fed in 2006.


When a multinational company deposits US dollar receipts from an export business in their domestic banks those deposits are frequently held in dollars. Think of it as a short term Certificate of Deposit denominated in US dollars.

Overseas banks may take those customer dollar deposits (liabilities) and place them in dollar assets such as CDO tranches and interest yielding debt instruments which are held as dollar assets on their books.

If those dollar assets decline because of a financial event as we are seeing today, the depositors may choose to withdraw their dollar deposit from the bank as they mature.

This places the bank in an awkward position since the corresponding assets have deteriorated in value, but the nominal value of the certificate of deposit liability remains the same with the requisite interest accrual.

As a result, a demand for dollars can be generated in the foreign country that is artificial but very real in terms of day to day banking operations.

This is the 'artificial dollar short' and monetary deflation about which so many have spoken. It is specific to Europe in this case because the ECB cannot print dollars, it can only obtain them from the Federal Reserve.

It has more of the characteristics of a supply disruption or a liquidity crunch in that demand is temporarily exceeding supply because of an exogenous event.

The central banks arrange swap operations, such as between the Fed and the ECB, to exchange Euros and Dollars to maintain the liquidity of their domestic operations.

If handled inefficiently or under event duress this could have the effect of creating a short term currency imbalance, increasing the cost of euro-dollar swaps, and driving the 'price' of the dollar higher in the short term, and perhaps quite sharply if the event is of sufficient magnitude.

As the imbalances are resolved the 'fundamentals' should reassert and relative values among currencies revert to the mean.

But in the short term a significant amount of dislocation and distress could occur in the arbitrage and banking markets.

We believe that we are in such an occasion now, as the European banks had been slow to markdown their degraded US assets, and had relied on swaps written by companies such as AIG which have failed, leaving the banks a day late and literally 'a dollar short.'

The resulting sharp rally in the US dollar is therefore likely to be an anomaly which will correct, and perhaps quite sharply, once the effect of the short term imbalances dissipates.

We do not have access to a Bloomberg terminal but would speculate that EUR.USD swaps have risen higher recently as the withdrawal pressures in the European banking system increased. This has little to nothing to do with the relative prospects for the fundamentals, but are what we like to refer to as 'the technical trade.' Real enough to the trader, but transitory.

Have you missed the exquisite irony that it was the US banks that sold the foul debt assets to the overseas banks that are now driving the demand for US dollars. And the US banks are quite possibly squeezing their foreign countrparts in the process?

We wonder if the ECB and other Central Banks agree with this and therefore understand that decreasing the value of the US dollar relative to their currency might be an effective policy response to some liquidity problems in their domestic banking system.

They may already be attempting to accomplish this, given the recent increases in the Fed swaplines with their foreign central bank counterparts. But they may also be getting squeezed by some multinational trading banks and funds.

Although we have been discussing this using the Euro as an example, the situation would apply to any national banking system which has been long deteriorating US debt and the monetary dollar fruits of the US current account deficit and their own mercantilism.

Don't confidence men generally rely on the gullibility and greed of their marks? We doubt the economic hit men are missing this opportunity to profit from a position of relative advantage.

No wonder some nations are complaining that they need a new basis for international trade not based on the dollar.

"It's good to be the King."

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Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.