Tuesday, 28 August 2012

Mike Lenhoff: This week it’s Fed time, next week it’s ECB time.

  • The minutes of the Federal Reserve’s late July/early August policy meeting released last week stated that unless news flow ‘pointed to a substantial and sustainable strengthening in the pace of the economic recovery’, additional easing would be warranted.
  • This week the Federal Reserve Chairman, Ben Bernanke, will speak at the symposium in Jackson Hole, Wyoming. He will review the backdrop for growth and monetary policy along with the options and course of action available to the US central bank for providing more support for the economy.  
  • In terms of potential comments on policy from Bernanke, examples might relate to an extension of the extended-period message on interest rates or to a twist on ‘Operation Twist’ in the direction of mortgage-backed securities. It is doubtful the take-away will be the hint of another QE programme. That will leave the markets having to wait for the Federal Reserve’s mid-September meeting to see how the cards fall.    
  • The ECB meets next week and will announce the detail on the framework it intends for effecting a smooth functioning of monetary policy, some of which, in relation to bond market intervention, was leaked over the past week. 
  • The leaks confirm that the options open to the ECB would be reviewed in producing measures to ‘repair’ the transmission mechanism for effecting monetary policy. Equity markets have gone far enough for now in anticipation of this.
  • What could drive equity markets higher is the upcoming ruling by the German Constitutional Court on the legality of the European Stability Mechanism, a key instrument for policy stabilisation, and on the Treaty underlying the fiscal compact. A favourable ruling on top of the ECB’s framework for aiding the transmission in effecting a smooth functioning of monetary policy would complete the stage required for the implementation of the ECB’s support mechanism and that should be greeted with a strongly positive reaction in equity markets, particularly for the eurozone. Market Tactics from Brewin Dolphin >
    Mike Lenhoff
    Chief Strategist
     

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