A question of liquidity

The Federal Reserve’s decision to keep printing dollars at an unchanged rate, mirrored by the Bank of Japan sticking with its massive stimulus programme, should have surprised nobody.

But markets seem marginally discomfited, interpreting the Fed’s statement as sounding a little less alarmed about the state of the U.S. recovery than some had expected and maybe hastening Taper Day. European stocks are expected to pull back from a five-year high but this is really the financial equivalent of “How many angels can dance on the head of a pin”. The Fed’s message was little changed bar removing a reference to tighter financing conditions.

However, the top central banks have sent a signal that they think all is not yet well with the world – the Fed, BOJ, European Central Bank, Bank of England, Bank of Canada and Swiss National Bank have just announced they will make permanent their array of currency swap arrangements to provide a “prudent liquidity backstop” indefinitely.

On the liquidity front, ECB policymaker Ewald Nowotny has stated that more will be made available to euro zone banks as the more than 1 trillion euros of cheap long-term loans issued late in 2011 and 2012 expire. He didn’t specify what that would entail. ECB board members Carlos Costa and Erkki Liikanen are speaking later.

We reported earlier this week that there are three trains of thought within the ECB about what policy move, if any, to make next. Some policymakers want to consider an interest rate cut, some to keep the option open of another long-term liquidity splurge for the banks a la last year’s LTRO and others in  the “core” euro zone don’t want any policy shift at all. Nowotny has said there is not much that can be done to curb a resurgent euro.

Consumer confidence reports have shown a dip in Britain for the first time in six months in October while morale in Germany edged down from a six-year high heading into November. Neither move should be overstated.

For Britain, a sharp increase in gas and electricity prices seem to have played a part but there is no sign of let-up in the housing market. The Nationwide building society says prices rose at their fastest annual pace in more than three years this month – up 5.8 percent year-on-year nationally, so one can only imagine what that means in frothy London. Housing markets are also likely to be on the agenda of Nordic finance ministers meeting in Oslo.

The French economy is strongly reliant on domestic demand as its growth motor. Consumer spending, just out, has posed a 0.1 percent fall in September, defying expectations for an increase. Consumer confidence has also been on the rise in the euro zone’s second largest economy but actual spending has been slower to follow suit.

Euro zone data are expected to show the unemployment rate unbudged at 12 percent and inflation steady at 1.1 percent, well below the ECB’s target of close to two percent. That is why the euro’s climb is starting to register with central bankers. If it goes significantly further, depressed import prices could push inflation dangerously low.

Spain might have climbed out of recession in a technical sense but with a jobless rate in excess of 25 percent and with wages having fallen dramatically, few will feel the benefit. One of the remarkable features of Spain’s miserable few years has been the general absence of mass protest, let alone unrest. Today, workers from various Spanish train companies have called a 24-hour strike, the day before a national holiday when many choose to take a long weekend and travel. It doesn’t look like a political game changer.

Neighbouring Portugal is battling to exit its bailout next year and might pull it off, though it is likely to need some sort of precautionary credit line (with yet more conditionality attached) as a backstop.

Today, parliament debates the 2014 budget which is expected to pave the way to a return it to normal debt market financing alongside the first economic growth since 2010. Prime Minister Pedro Passos Coelho will attend the debate. A vote on the budget could come tomorrow. A significant fly in the ointment is the Constitutional Court and its penchant for throwing out a number of government austerity measures.

The monthly Reuters asset allocation polls will offer a guide to where the serious institutional money is heading. With the Fed having put off tapering, probably until next year following the U.S. political debt spat, stocks continue to look flavour of the month, or quarter.

Source: reuters.com