The PBOC is attempting to slow the growth of credit by starving the shadow bank system of liquidity. Chinese banks have been using loans from the PBOC and each other to speculate in financial markets, and the PBOC is not pleased with this. In response, the PBOC ceased providing liquidity injections forcing banks to turn to the interbank market. The dearth of available overnight funds took the banks by surprise, and they bid rates up while fulfilling their liquidity requirements.
The PBOC is playing with fire. There is a very thin line between a liquidity crunch and a full-blown market panic. While the crunch is under control for now, this may be just a temporary respite until banks require funds prior to the end of the quarter next week.
Bullard is a well-renown hawk in the circles of finance and central banking. Indeed, he has been critical at times of the unprecedented monetary easing that has taken place since the onset of the GFC in 2008.
His resume makes him the perfect person to restate the Fed’s policy agenda in the wake of the taper tantrum of the last few days. What Bullard said was that disinflation/deflation remains a concern and that the Fed should make it clear that they will continue easing to attain their goal of 2% inflation. Bullard believes that monetary policy should be based on the economy and not a calendar.
No matter the reason, Bullard’s appearance throughout the financial media two days after the Wednesday debacle is meant to deliver the message that printing will continue as scheduled.
Update****Analysis: Markets Might Be Misreading Fed’s Messages – Real Time Economics – WSJ. A Hilsenrath special to save the day. Mr. Hilsenrath is emphasizing the dovish components of the FOMC release in his piece.
In this article, the mainstream media has fully bought into the Eurozone recovery meme that it has created. The article tells the story of a Eurozone slowly emerging from recession and financial turmoil only to have victory snatched away by the fickle hand of the Fed. Must the Fed be blamed for everything? A more reasonable analysis of the evidence is that the Eurozone is still mired in a recession with no signs that growth is about to start.
PMIs still show a contracting economy, and well-performing markets were a result of cheap liquidity flooding the planet. Take away the liquidity, and you’re left with a basket case. Don’t blame Uncle Ben because the markets are once again revealing the cold, hard truth of a poorly designed currency union.
Mediobanca announced that it would be selling stakes of Italian companies to raise capital. Of course, it was vague about needing capital, but the markets saw through the ruse and knocked the stock down almost 10% today. If the recent swoon in Italian sovereign debt continues, it may have to raise even more capital. This problem is shared by virtually every Italian and Spanish bank. They are all stuffed to the rafters with dodgy sovereign debts, and as the sovereign deteriorates do their balance sheets. It will be a long, hot summer for the Eurozone.
Another sticking point has emerged in the endless banking union talks. The eurocrats still have not figured out a way to pay for resolution authority and depository insurance, and now it seems that each country is attempting to water down the resolution rules so that politically preferred groups do not lose their money when the banks begin failing.
If banks resolutions are treated differently throughout the eurozone, entities will move their money to the jurisdiction with the most favorable rules and the strength to finance the consequences of those rules. In other words, there will not be a single market for banking service, hence no banking union.
Greece remains dysfunctional. The Democratic Left has withdrawn from the government removing its cabinet ministers in an empty gesture. The grand coalition of PASOK and New Democracy will continue its Euro-1st, Greece-2nd policies as these two parties are who got the country into trouble in the first place.
A game of brinkmanship is developing regarding the next bailout payment in late July. With each member of the troika digging in its heels, the Greek government better be strong enough for tough negotiations and more concessions over the next month.