The first sign that Uncle Ben would be returning to the private sector is his planned absence from 2013’s annual Printicon for central banks in Jackson Hole, Wyoming in August. The next sign was revealed by President Obama in a recent interview with Charlie Rose. The president lauded the Chairman’s efforts and mentioned that he had already remained in the post longer than he wanted.
It seems a new chairman in in our future. While everyone is speculating on whom the next chairman will be, the actual choice does not matter much. There are no candidates who will change the Fed’s present course.
The ECB is constrained in its actions because it does not operate like a standard central bank. While the other major central banks have engaged in QE, the ECB is prohibited from deploying this tactic because the ECB is not allowed to monetize the debt of member countries unless the Germans say it is okay.
The Germans allowed SMP and OMT even though these programs call for the purchase of sovereign debt, because they were afraid the Eurozone would collapse. As the breakup risk has receded in recent months, the Germans are being very strict with the ECB. As such, the only thing that poor Super Mario can do is jawbone and jawbone he did.
While he mentions that the ECB has room to maneuver, he was very vague on the details. The bottom line here is that if there is trouble in Europe again, the ECB and the other eurocrats are not prepared to deal with it.
Today’s bad news from Europe is from the auto industry. Europeans purchased the fewest new cars in the month of May since 1993. The European auto industry is a basket case. Only the Germans and a few luxury/sports car companies manage to perform well internationally, so demand for cars must originate from within. Increasing unemployment across the eurozone does not bode well for these manufacturers. The immediate future will bring worsening sales and lots of layoffs. Decreasing production and shuttering factories will operate as a drag on growth for the next two or three years.
It is not just Asian currencies that are feeling the effects of the market’s taper tantrum. All emerging markets have been affected. The long rally in emerging market currencies ended in the Spring. The currencies began sliding together commencing May 2 with a inflection point to a steeper decline beginning May 22.
The infected countries have deployed an array of strategies to support their currencies including interest rate hikes. A surprise rate increase by Indonesia on Thursday has supported the rupiah, so far. Either these currencies will settle in at new trading levels against the dollar, or there could be a panic. As long as China remains stable, the former case is more likely.
This is one of my favorite charts. It’s worth more than a thousand words, because it tersely relates with one view what takes a couple of economists a whole report to say. A Fed exit will lead to increased volatility, which is exactly why it will not happen. Note the gray areas on the chart above. As you can see, if the Fed isn’t printing or promising to print, the market falls down.
We have two articles analyzing the present liquidity crunch in China. Bloomberg puts for the hypothesis that China could be standing on the edge of a full-blown banking crisis while the WSJ thinks that the PBOC is experimenting with a more flexible monetary policy.
China is opaque, so we do not know much about the present state of its banking sector, but the chart is telling. Interbank loan rates remain at record highs, but the PBOC does not seem to worried. Ultimately, we’ll know who is right by the end of the summer.