Central banks out in force this week

Outlook

The calendar is overstuffed with important data this week in a market that is now free of the dis-traction of soccer in Brazil. In the US, we have Yellen tomorrow and Wednesday, which probably overshadows everything else, and we also have corporate earnings galore, with a lot of banks this week (including Citibank, which just threw itself into the briar patch of the Feds to escape the State of New York). This week in the US we get June retail sales, June industrial production, July NAHB Index, the Fed's Beige Book prepared for the July 29-30 Fed meeting, weekly jobless claims, June housing starts, Philadelphia Fed survey, preliminary June University of Michigan sentiment survey and June leading indicators.

But we also get a ton of data out of China and even if most analysts suspect the data is rigged, it still hold the power to shock. Wednesday we get Q2 GDP, expected to be in line with Q1 at 7.4%, along with retail sales, fixed asset invest-ment and industrial production—and oh, yes, reserves, which we thought were due last week. Chinese property data is due Thursday night.

Central banks are out in force this week and not just in Washington. The BoJ is holding a 2-day meeting, and tomorrow we get the RBA minutes. BoE Gov Carney testifies to the Parliamentary Treasury Committee this week while the UK releases data on housing and inflation (Tuesday) and the labor market (Thursday). Then on Saturday, G20 trade minis-ters start meetings in Sydney Australia.

Some analysts say the big central bank news is Draghi addressing the European Parliament today to talk about the near trillion-dollar bank lending boost. Well, it’s actually €700 billion or about $950, but “trillion” sounds so much more im-pressive. Bloomberg reports “The ECB has identified lending to companies and households as a key weakness in the euro area’s fragile recovery. The so-called TLTRO program, part of a wider package of measures announced in June, offers as much as four years of low-cost funding tied to bank lending that Draghi said this month could ultimately pro-vide as much as 1 trillion euros.” The banks should go along and the only problem is when the bill comes due in 2018.

But “Lenders probably won’t take the full amount, the survey shows. They’ll borrow 305 billion euros in the first TLTRO rounds this year, compared with an ECB cap of about 400 billion euros, according to the median estimate of economists. That’ll rise to 710 billion euros after quarterly operations in 2015 and 2016 tied to new loans, the survey shows.” However, “The survey also showed economists predict ECB preparations to buy asset-backed securities will take longer than previously thought. The program could add liquidity to the market and bolster the market for securitiza-tion, offering companies an alternative to bank financing. About 44 percent of respondents expect the ECB to start an ABS-purchase program by the fourth quarter of this year, down from 52 percent in last month’s survey.”

Here’s the bottom line: a small minority of economists (14%) think the eurozone economy will find its legs in the up-coming month, with 75% saying the outlook remains the same. A German bank economist told Bloomberg “The percep-tion of the euro zone’s current state has weakened considerably. There is increasing uncertainty about the strength of the recovery taking place.”

And yet the euro is on the firm side, or at least holding at support off the last lows. Go figure. When the relative yields and economic analysis fails, we have to blame “positioning.” In other words, some big players have a permanent bias favoring the euro and they are squeezing the rational shorts. Anyone with a better idea, please write.