Bundesbank tries to spoil the party, as usual – ignore them

Italian July business confidence fell to 87.1, down from a revised 88.7 in June and much weaker than the forecast of 88.4;
Spanish 2nd Q unemployment rose to 24.63% in the 2nd Q, from 24.44% in the 1st Q, but slightly better than forecasts of 24.85%. It was the highest rate since 1976 and is expected to rise above 26% in coming months, given recent action (not enough though) in terms of labour reforms;
French July consumer confidence fell to 87, down from a revised (lower) 89 in June and weaker than the forecast of 90;
German reaction to Draghi’s comments yesterday were predictable. The Bundesbank continues to oppose the ECB buying peripheral debt. However, they say that the EFSF buying peripheral debt is “unproblematic” – well, thank you Mr “Weirdmann”. In addition, the Bundesbank opposes the granting of a banking licence to the ESM, stating that it would be a “de facto financing of governments, which is prohibited”. Quite frankly, there are ways to get around this alleged prohibition, by the way. A senior German politician ranted against Draghi’s comments. All I can say is can we please have a break from these morons – are they living on the same planet or on cloud cuckoo land, as most of us suspect. A spokesperson from the German finance ministry tried to calm things down. They stated that just as the ECB, Germany will do everything possible to save the Euro.
Given the predictable German (Bundesbank etc) reaction, it is unlikely that Draghi will state that the ESM will be granted a banking licence (he may go as far as saying that the ECB will look at it) at the next ECB meeting next Thursday. He will have to confirm that the ECB will resume its SMP (Bond buying) programme and, in addition, may bring forward a 25bps interest rate cut, together with adjusting collateral rules. To go further re granting the ESM a banking licence ahead of the German Constitutional Court  decision would be problematic, possibly dangerous. Finally, please note that the German’s have just 2 (out of 23) voting representatives on the ECB ie they will be outvoted. The German Constitutional Court remains the much more serious issue. Forget the likes of Mr “Weirdmann”. He has been and will continue to be ignored. Having said that his comments are really unhelpful and I’m being polite;
Ireland, yesterday raised over E5bn through the sale of 5 year and longer dated bonds. Good news;
There is much speculation that the ECB will grant the ESM a banking licence, as referred to as a possibility, by ECB council member Nowotny last Wednesday. As you know, I believe that the ECB will have to and/or the ESM will have to issue bonds to increase its firepower, these bonds being able to be used as collateral to access ECB funding. The EFSF/ESM is simply not large enough in terms of firepower otherwise. However, I not sure as to whether such an announcement is imminent (indeed, I think it is unlikely), particularly following the predictable German opposition (Bundesbank) today and the impending decision by the German Constitutional Court.
However, given Draghi’s comments yesterday, he has to talk about resuming the SMP ie the ECB’s bond buying programme, which is what I expect him to do at next Thursday’s meeting. He may well cut rates by a further 25bps, rather than wait till September, as well. Tweaks to the collateral requirements are also likely – he may bring that forward – he had previously suggested that te announcement would be made in the autumn.
Just 1 issue. If the ECB/EZ has a CREDIBLE back stop, the contagion threats of Grexit diminishes materially. As you know, I believe that a Grexit is inevitable, maybe even this year, but by the 1st half of 2013 at the latest;
US jobless claims declined by 35k to 353k for the week ended 21 July, lower than forecasts of 380k. The less volatile 4 week moving average fell to 367k, from 376k, the lowest since March. The number of people claiming jobless benefits dropped by 30k in the week ending 14th July to 3.29mn. Those collecting emergency and extended benefits rose by 27k to 2.59mn in the week ended 7th July. Surprisingly better numbers as analysts expect that employers are effectively on hold until the outcome of the elections is known;
Headline durable orders rose by +1.6%, higher than the +0.3% expected. Orders for civilian aircraft rose by +14.3%, while military orders surged by 62%. However, orders excluding defence and aircraft declined by -1.4%, much worse than the +2.7% rise in May and the increase of +0.1% expected;
US pending home sales index declined by -1.4% to 99.3 in June (+5.4% gain in May to 100.7, revised lower), much weaker than the +0.3% rise expected. However, on an YoY basis, the index is up +9.5%. Disappointing, but I remain of the view that the US housing market is picking up. Indeed, I’m long the building materials sector. Bloomberg reports that 30 year mortgage rates have fallen further – currently 3.49% for the week ended yesterday, the lowest since records were 1st kept in 1972. However, stricter lending standards are restraining a pick up in housing, in spite of the record low mortgage rates. On a negative note, mortgage delinquencies increased to 7.14% in June, from 6.91% in May;
The Bundesbank and other similar comments by German politicians was predictable. However, forget the Bundesbank – they only have 2 out of 23 votes on the ECB and, indeed, will be outvoted.
The decision by the German Constitutional Court remains a far more serious issue.
Next Thursday, I believe the ECB will announce the policies I set out above. Le Monde states today that the ECB will buy peripheral debt, though the Bundesbank states that such a course of action would violate the ECB’s mandate.
Basically, it’s the same old mickey mouse stuff from the EZ.
The bottom line is that there is no other choice, but for the ECB to act. One of my major fears was the lack of policy action till September by EZ politicians, for the reasons I have previously discussed. The likely ECB policy action next Thursday should help to plug this delay/gap.
European markets, having opened higher, reacted negatively to the Bundesbank/German comments and are now lower.
However, I still believe that Draghi’s statement yesterday was far more important than the silly comments today by the Bundesbank/German politicians and have used the dip today to add to my long positions.
US 2nd Q GDP, to be released later today – the risks are to the downside.
Tied up today, so short note.
Have a great weekend. I will be taking a few days off next week as it’s the legendary Galway races (actually a week long party) here on the West coast of Ireland. Great fun for those of you who don’t know about it.
Kiron Sarkar

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