FED watch today

Japan posted its 1st ever trade deficit with the EU. In May shipments declined by -0.9% YoY, though up 38% to the US. Imports rose by 6.0%, resulting in a  trade deficit (US$141bn). The weaker data may spur the BoJ to vote for more monetary easing next month, especially as it is due to update its inflation forecast
Premier Wen states that “More priority should be given to maintaining stable economic growth” ie increase the current stimulus programme. Fixed asset spending is likely to increase, yet another reason I like the miners;
Greece was supposed to announce that a coalition was formed yesterday – looks like its been delayed. Well, it is Greece, after all. The coalition is expected to include New Democracy, Pasok and a leftist party. New Democracy’s mandate runs out tomorrow lunchtime, Greek time. Please go away;

10 year Spanish bonds are yielding 6.91%, though 5 year are at 6.30% and have been declining this morning. Mr Monti is pushing for the EFSF/ESM to buy peripheral debt in the secondary market. LCH Clearnet has increased the margin on Spanish debt.The idea seems to be getting attention, which explains the lower Spanish bond yields. Mrs Merkel is not totally on board, but the FT reports that she is moving towards supporting the idea. However, comments from the EU deny such reports. The G20 communique contained a sentence suggesting that borrowing costs for the peripheries had to be reduced. In addition, the possibility of the bail out funds to Spain ranking parri passu with existing outstanding debt is back on the table, according to the WSJ;
German PPI fell by -0.3% in May MoM, or +2.1 YoY, slightly faster than expected. should decline even further in coming months. The decline in inflation will help the ECB reduce rates, most likely at the next meeting on 5th July;
European Commission President, Mr Barosso got quite excited at the G20 yesterday – indeed one could say that he started throwing his toys out of his pram, following criticism allegedly from China. FYI, Mr Barosso and Mr Rumpuy were chosen for their roles, as they were the least likely to impact EU leaders ;
The European Parliament has come up with a great solution to sovereign downgrades by the credit agencies. BAN THEM – I kid you not;
BoE minutes in respect of the June meeting  reveal that 4 (out of 9) members (including Governor Mr King) wanted to increase QE, from the current £325bn – suggests to little old me, that another round of QE is on its way in the UK – £50bn?, next month. However, unless the BoE starts buying other securities, such as MBS’s, another bout of QE is unlikely to have much of an impact, particularly as UK economic data is deteriorating and inflation is declining far faster than analyst expectations. UK jobless claims unexpectedly rose by 8.1k in May, as opposed to a decline of 4k expected. The unemployment rate was unchanged at 8.2%. Employment has held up so far, but cracks are appearing;
US housing starts declined by -4.8% in May MoM, lower than the 720k (on an annual rate) expected. However, YoY, starts are up +28.5%. Permits rose by +7.9% to an annualised rate of 780k in May (the highest since September 2008), well above the 730k expected. Some analysts (Barclays) believe that residential construction will contribute to US GDP for the 1st time for many many years, this year;
Markets are expecting the FED to expand Operation Twist above the current US$400bn. If the FED does not deliver, it will be a definite whoops for markets as expectations are  that the FED will deliver. Personally, I expect the FED to deliver;
Asian markets (ex China, which closed slightly lower) rebounded, following up on better European and US markets. European markets are (modestly) lower, with Italy and Spain outperforming (1.0% and 1.5% respectively) on expectations of some policy measures at the Heads of State meeting on the 28/29th June.
Brent is around US$95.50, with gold at US$1618.
The VIX is down nearly 25% in the last 3 days – does not suggest panic to me.
German 10 year bund yields continue to rise – currently 1.59%.
All eyes on the FED today.
Kiron Sarkar
20th June 2012

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