Dissent within Fed and ECB gets market attention

Outlook:

The week ends with the Jewish high holidays as well as quadruple expiration and preparations for the month and quarter-end (mutual funds’ year-end). We have data this week, including today’s existing home sales, but all in preparation for possible Events next week—month and quarter-end, the ECB, and another US payrolls.

Before then, we get to cogitate on dissent within the ECB and within the Fed. Over the weekend, BBK chief Weidmann told the press that he had opposed the rate cut and ABS purchases, saying ABS allows banks to transfer risks from themselves to the taxpayer. Well, yes. Weidmann’s point is that the ECB should be cracking down on stupid bank practices, not encouraging them, while letting member govern-ments slide on structural reform. If nothing else, lower yields are lower government borrowing costs. The focus is wrong—it should be national governments, not banks. Meanwhile, we await comments from Draghi (at the EU Parliament or on the sidelines) on the lousy bank response to the TTLRO last week, less than half of the refi’s taken up by the banks.

We also get to think about the conflict/contrast between the dovish Fed statement and what it means in the context of the hawkish dot-plot. The head of the NY Fed, Dudley, gives a speech—he is thought to be worried about liquidity in a world awash in liquidity (which we do not understand). He’s the guy on the front line so arguably the most important of the regional Fed presidents. We also hear from dove Kocherlakota (Minnesota).

But these are all known or relatively knowable unknowns. What is the unknown unknown is China. FinMin Jiwei told the press that “the economy faced downward pressure and reiterated there would not be big changes in policy in response to individual economic indicators.” Evidently, taming the shadow banking and official banking sector is a higher priority than the 7.5% growth rate. The FT notes a dis-tinct risk-off tone arising from this development. Well, that can be dollar-favorable.

So far, we see no reason to pull back from our judgment that the dollar continues the rally, even if we get the usual Tuesday pullback on profit-taking and second thoughts today and tomorrow.