The Wall Street Journal appears to be saving money by dispensing with journalists and using human drop boxes instead. Thus in the New York markets the “Hilsenramp” signal is already a well-known event which occurs at approximately 3pm on/during/after Fed meeting days, and is posted under the byline of “Jon Hilsenrath”. In simple packaged form it provides fast money speculators with a message from the B-Dud, otherwise known as William Dudley, President of the New York Fed, on why the Fed will back-up another run at still higher record highs.
So today comes a drop box message with respect to ECB policy posted under the byline of “Brian Blackstone”. Self-evidently, the staff of the Bundesbank is negotiating with Mario Draghi in public. The latter backed himself into a corner last meeting by committing to a dramatic new easing round in June in order to avoid being finally called on his 2012 promise to do “whatever it takes”, which so far has been nothing.
But the ECB is still not ready to bend over for outright bond-buying Bernanke/Yellen style—so it has kindly deposited in Murdoch’s drop box alternative measures that would be acceptable. These apparently include negative deposit rates, a year’s extension of the so-called fixed rate full allotment loan facility, a new long-term fixed rate loan program for commercial banks and some purchases of asset-backed securities.
In other words, the Bundesbank is splitting teutonic hairs on the matter of money printing. It resolutely opposes buying government debt directly—least it encourage the demonstrably and incorrigibly debt-addicted politicians of the EU to become even more fiscally enebriated. Instead, it will inject freshly minted funds into EU banks so that they can do the dirty work with the newly opened space on their balance sheets—that is, buy the government debt.
So the Germans are not going make a stand for monetary sanity, either. They are just negotiating the terms of surrender by using Murdoch’s drop box. Specifically, they are painting a bright marker on the ECB staff’s upcoming inflation forecast—the very same marker that Draghi laid-out in his recent post-meeting statement.
In that regard, the ECB staff like all central bank forecasting outfits professes to know the path of European inflation to the decimal point. To wit, 1.0% this year and reaching exactly 1.7% in about 30 months from now by the end of 2016. But according to today’s drop box message from the Bundesbank that forecast just won’t do. Only if the ECB staff peers more deeply into its crystal ball and finds a more significant shortfall from the ECB’s presumably wholesome target of 2.0% inflation is it willing to bless more oomph on the printing presses:
But these steps aren’t a done deal, and depend critically on the ECB’s forecasts for inflation through 2016 that are due when the ECB meets on June 5. The central bank currently expects inflation to average 1% this year, 1.3% next year and 1.5% in 2016. ECB staff economists expect that, by the end of 2016, inflation will be around 1.7%.
The Bundesbank expects forecasts for this year to be marked down.
If the ECB keeps its 2016 projections unchanged then Germany’s central bank would be reluctant to support new stimulus measures, the person said.
The number of steps on stimulus it would back depends on how far the 2016 inflation projections undershoot current estimates, the person said.
The answer is thus reasonably evident. The ECB staff needs to re-set the inflation path so that the year-end 2016 number does not exceed 1.255%. Presumably then even the historically inflation-phobic bubba would call for moooar money and inflation.
Needless to say, in a world pregnant with geo-political, financial and economic disorder—including the accelerating slide toward meltdown in China, old-age bankruptcy in Japan, and cold war resumption on the Ukrainian front—-the idea that the ECB staff can forecast CPI inflation 30 months down the road to the third decimal place is farcical; it’s the central bankers equivalent to counting the angels on the head of a pin.
But that doesn’t matter because today’s drop box messages are not actually about the distant and unknowable economic future. They are about the need for another surge of front-running by the fast money traders in order to sustain the utterly lunatic condition under which Spain’s 10-year bond is trading at a lower yield than its equivalent US treasury note.
Obviously, the promise of a new round of easing by the ECB in June is just what the doctor ordered. And today’s drop box messages are just what is needed to “build confidence” among fast money traders so that their current heavily long positions in peripheral government debt will be maintained and enlarged.
Just to make sure that signals are clear, Murdoch’s drop box carried a second message today under the by-line of “Richard Barley” . After a lot of sophistry as to why five year Spanish debt yielding under 2% (“inflation-adjusted”) is actually a bargain due the fact that headline inflation has computed lower than trend for a few months now, the post gets to the meat of the matter. Spanish, Italian and even Greek bonds are a “buy” because the German’s are caving and the Draghi’s money machine is fixing to crank into a higher gear:
The euro-zone bond rally is remarkable. Spanish 5-year yields have fallen from north of 7% in 2012 to below those of U.S. Treasurys; Irish 10-year yields, which came close to 14% in 2011, are below those of the U.K. The market hasn’t lost the plot on credit risk, though. The current levels reflect the problem of very low euro-zone inflation and the big-bazooka policy response investors think might be coming.
…. On an inflation-adjusted basis, (Spanish) yields are higher than in the U.S. and U.K. Spain’s dollar-denominated bonds due 2018 yield around 2.07%, according to Tradeweb, more than five-year Treasurys due 2019 despite having a shorter maturity.
That reflects the true force driving bond markets…. the European Central Bank seems set to loosen policy in June, with the Bundesbank onside….
Given that array of forces, it wouldn’t be surprising to see euro-zone yields—including Germany, Spain and Ireland—fall further still versus those of the U.S. and U.K.
Once upon a time markets processed real world information and there was a need for independent financial journalists with actual investigative and analytical skills. But Murdoch did not become a multi-billionaire for nothing. In today’s central bank dominated financial markets he has apparently learned that human drop boxes will do just fine.
Reprinted with permission from David Stockman.