The sequester starts on Friday and we will not be getting a reprieve. It was designed to be too awful to contemplate and thus a spur to get a proper budget deal, but at the last minute, the Plubs decided they could live with defense cuts to punish the President for not inviting them to lunch. Despite the sequester and the end-March debt ceiling deadline (yes, again), the public just don’t care. The Feb Consumer Confidence index rose to 69.6 from 58.4 in January. And Bernanke isn’t going to tell anyone a blessed thing about ending QE. It was silly to have expected any other outcome at this point in time. Later, maybe. Attention is going to turn quickly to the one data point that counts—tomorrow’s jobless claims and next Friday’s nonfarm payrolls. Next week will be awful. Still, perception is that the US economy is in far better shape than Europe’s, and sufficiently robust and flexible to overcome stupidity in Washington.
Meanwhile in Europe, self-inflicted contraction arising from austerity is joined by political risk. Analysts say, and they are right, that Germany is pretty much holding things together by sheer willpower (and the power of example). With Italy at sixes and sevens, the eurozone lacks coherence and cohesion. Nothing can get done, whether it’s talk of the Cyprus bailout or even issues at the ECB. Draghi’s promise to do “whatever it takes” was based explicitly on governments sticking to budget contraction and other measures to qualify as EMU members— the Maastricht Treaty, Stability Pact and other agreements. As long as governments tried their hardest to comply, Draghi would intervene in bond markets to correct any misperception by the bond gang.
But political risk in Italy is exactly contrary to the spirit of Draghi’s promise. Berlusconi and Grillo got votes specifically because these politicians promised to roll back Monti’s reforms. How could Draghi step forward now and use the ECB’s bond-buying power when the country is violating his terms and conditions? He can’t. If a new government after Monti starts dismantling the Monti reforms, Draghi has to wash his hands of Italy in terms of supporting its bond market. On the other hand, a new government could be imposed (as it was last time) with Monti again, or some other sane person, in which case the ECB may step forward for the first time, even in the absence of a crisis, to make the point. We don’t know which it will be, or some third way, but in any case the thing to watch is the ECB response to political conditions in Italy. It’s not going too far to say the future of the EMU depends on it.
Until these matters get resolved or at least become clearer, it’s hard to see how the euro can thrive, despite a minor pullback here and there.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|
|USD/JPY||91.65||LONG USD||STRONG||10 /17/12||78 .71||14.12%|