Be careful what you read

Outlook:

Yesterday’s Beige Book (prepared for the April 26-27 FOMC) was mostly upbeat. Seven of 12 districts judge growth to be modest to moderate, up from 6 last time. Wages were up in all areas except Atlanta. Moreover, prices are up “modestly,” in comparison to the last Beige Book in which prices were “generally flat.”

Sounds good, right? Think again, Yesterday’s retail sales for March was -0.3% for the third consecutive monthly drop. The WSJ links the retail sales numbers to GDP forecasts, Macroeconomic Advisers forecasting 0.9% for Q1. Nomura has 0.7%, J.P. Morgan Chase has 0.2% and Wells Fargo, 0.1%. Analysts note that the first quarter is often a bummer, as it was last year, and this year we had a financial market crisis in January set off by China.

Today we get March CPI, with the core likely at 2.3%, the same as last time but the highest since 2008. This doesn’t goose the market into believing in an earlier hike schedule, although if the eurozone is emerging from deflation, as today’s data suggests, that might go quite a way toward firming up the Fed’s resolve.

And what is the Fed’s resolve today? The CME Fed funds futures indicate an 18% probability of a June hike. The WSJ economist survey gets 75%. This is from over 60 economists. See the tables. Wow, what a disconnect.

If the dollar rally is going to be a short-lived affair, as seems likely, we need a trigger to get it moving in reverse gear. Sheer uncertainty may suffice and heaven knows, the disconnect between an 18% and a 75% probability of a June hike is a surplus of uncertainty.

Be Careful What You Read Dept: Yesterday we heard a rumble from the fringes (nakedcapitalism.com) that Something Big is going on at the Fed. First, the Fed held an “expedited special meeting” on Monday. Then Yellen met with the President on Tuesday, a very rare occurrence in any administration, purportedly to compare notes on the economy. At the same time, amid a flurry of other events, Austrian bank Heta Asset was “bailed in” but the effort failed—it’s the first bail-in under the new ECB regime. And Italy’s FinMin called an emergency meeting of Italian bankers to consider “last resort” measures for dealing with €360 billion of bad loans in banks that have only €50 billion in capital. The implication is that somebody in Europe asked for the Fed’s help and Yellen consulted Obama about it.
A similar litany appears in other blogs (wolfstreet.com), all of the gloom-and-doom variety. We like backroom stories as much as the next guy, but this one stinks right off the bat. There is no way a eurozone member bank could undergo a failed bail-in and the major financial press miss out on the chance to report it. First, the bail-in of Heta was reported on Sunday and there is nothing “failed” about it. The bank had failed (as had it predecessor banks) but the bail-in did not fail. The bail-in included a 54% haircut for senior creditors and other measures. It’s easy enough to Google “Heta” and get all the details. To leap from the Credit Anstalt failure that “started” the Great Depression to this one with the same outcome—another Great Depression--is just plain silly.

As for the Italians needing emergency help from the Fed, that would raise Mr. Draghi’s eyebrows. The Italian banking system has been inching toward something like TARP, a fund named Atlante, that should be operational by the end of April. Some things remain to be done, like writing new bankruptcy laws so that collateral ban be recovered without the usual 7-8 years wait when the European average is 2-3. Our European Reader forwards a note from in-house analysts saying “A quicker process could significantly increase the value of NPLs and facilitate the creation of a secondary market, at the moment virtually inexistent.”

Atlante won’t do everything. It is likely to halt contagion and relieve pressure on certain banks that need to raise capital, but “the fund is unlikely to provide a stable medium term solution to the problem of high NPLs in the Italian banking sector.” And why would any European banking chief or Finance Minister approach the Fed about it—Europe has plenty of financial institutions of its own, including a very capable central bank.

And it’s true that two of the big Italian banks with the worst NPFs are meeting today and PM Renzi may have to take some actions on executive authority instead of Parliamentary or regulatory initiatives, but since when has messiness in Italian politics implied anything other than the usual state of crisis?

Be careful what you read. We get some flack sometimes for relying on the mainstream press and big wire services (at a pretty penny in cost, we should add), but one of the key criteria of mainstream reporting is that facts are facts and not rumors, and double checked for accuracy. Even reports in which the source refuses to be named, the press goes out and gets a second unnamed source and if a second one is not to be found, that gets mentioned in the story. And the mainstream press doesn’t tie unrelated events together to imply they are related, like bad loans in Italy somehow being connected to Yellen meeting Obama.

Granted, we don’t know why Yellen met with Obama. Meetings like this are rare enough to get radar spinning. Something is probably going on. The topic was the economy and Wall Street reform, so let’s pick Wall Street reform. The next day we read that the “living wills” of the five big banks that would direct a breakup in the event of failure were not acceptable (although Citi surprised with a win) and the Fed was one of the regulators behind that. With Bernie Sanders calling for a breakup of the big banks but not having a plan to do it, this is actually a juicy topic, but not necessarily one calling for secrecy. Unless Obama wants to break up the big banks and steal Bernie’s thunder, but that’s not the way he does business.

The Yellen-Obama meeting was literally a behind the scenes consultation and we may never find out what the real subject was. But the likelihood of the meeting having anything to do with European banking problems is almost certainly zero. We can keep guessing if we like, but the guessing should at least fall on the right continent.