Monday, July 30, 2012

WIT (“Whatever It Takes”)

Mario Draghi likes his job and wants to keep it. He is the President of the ECB, which was created to manage the euro within the European Monetary Union implemented on January 1, 1999. Therefore, it wasn’t all that surprising to hear him say last week that “the ECB is ready to do whatever it takes to preserve the euro” since he wants to keep his job. Nevertheless, the S&P 500 rose 3.6% on Thursday and Friday after Draghi's assurances, while the MSCI Europe stock price index jumped 3.9%. The Spanish 10-year government bond yield plunged from a record high of 7.63% on Tuesday to 6.50% this morning. The euro also surged.

The hoopla was triggered by Draghi’s presentation on Thursday, July 26 at the Global Investment Conference in London. Given the importance of what he said and its impact on the markets, it was very odd that the speech wasn’t based on a prepared text. The ECB’s website billed it as the “Verbatim of the remarks by Mario Draghi.” According to the official transcript, Draghi said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” A video shows that he actually repeated “within our mandate” twice. Draghi seems to be saying that his mandate is to save the euro no matter what.

The markets were happily surprised because Draghi’s remarks suggested that the ECB’s Governing Council--which includes six members of the Executive Board and the governors of the 17 euro zone central banks--may vote on Thursday to restart the central bank’s program of buying government bonds of debt-challenged euro zone members like Spain and Italy. Not so happy might be the other members of the Governing Council, who apparently were also surprised by Draghi’s off-the-cuff statement.

Financial markets will be nervously awaiting the results of Thursday’s meeting to see if the ECB’s Governing Council will buy Draghi’s “more Europe” by agreeing to purchase more Spanish and Italian bonds.

Financial markets will also be nervously awaiting the conclusion of the next FOMC meeting on Wednesday. A week ago, John Williams, president of the Federal Reserve Bank of San Francisco, said he favored QE3, with the Fed buying mortgage-backed securities, in an interview reported in the FT. He is a voting member of the FOMC. In his interview, he warned of significant downside risks to the US economy from the fiscal cliff, the euro zone crisis, and the global slowdown. He proposed that the next round of QE be open-ended without specifying how much the Fed would purchase and when the program would end.

Then last Wednesday, Jon Hilsenrath reported in the WSJ that Fed officials “are moving closer to taking new steps to spur activity and hiring.” Mr. Bernanke is frustrated that the economy is “stuck in the mud” and has yet to achieve “escape velocity.” QE3 is on the table, and the Fed is “exploring other novel measures,” such as to provide cheap credit directly to banks that make new business or consumer loans.

On Friday, we learned that real GDP rose only 1.5% (saar) during Q2, down from 2.0% during Q1 and 4.1% during Q4. Real final sales rose just 1.2% (saar) during the second quarter, the slowest since Q1-2011. On a year-over-year basis, real GDP is up 2.2%, with consumer spending up 1.9%, while real wages and salaries are up only 1.6%. We now have four July regional Fed business surveys, for New York, Philadelphia, Richmond, and Kansas City. The average of the composite business indexes remained negative for a second month in a row at -4.4, led by a negative reading for orders.

This could be an interesting week if both the Fed and ECB implement another round of WIT ("whatever it takes").

Today's Morning Briefing: Whatever It Takes. (1) ECB wants to stay in business. (2) Mario’s WIT, i.e., “Whatever It Takes” (3) The Bundesbank is not amused. (4) Cheerleaders in Paris and Berlin. (5) Bottomless pit in Spain. (6) Schäuble says nein. (7) The euro is a bumblebee. (8) Will the ECB buy “more Europe?” (9) Will the Fed buy more bonds? (10) WIT makes stocks smile. (11) Do earnings matter? (12) America’s two economies. (13) Britain gives itself gold medal for entitlements. (14) “The Intouchables” (+++). (More for subscribers.)

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