01-Dec (Der Spiegel) — The boost from Wednesday’s coordinated action taken by major central banks around the world was immediate, but short lived. Whereas global stock indexes shot up after the announcement that the European Central Bank (ECB), the US Federal Reserve, the Bank of England and others would make it easier for banks to access US dollars, the euphoria quickly faded on Thursday.

Indeed, even ECB chief Mario Draghi felt compelled to warn against misplaced optimism. In a speech to the European Parliament on Thursday morning, he said that “downside risks to the economic outlook have increased.” In other words, the euro crisis, which has recently morphed into a financial crisis, could soon become an economic crisis.

But Draghi also seemed to hint at a possible way out of the downward spiral, saying that the ECB could be prepared to take additional steps to halt the crisis. First, however, Europe needed to move quickly toward greater economic integration.

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01-Dec (Reuters) — Germany would like European countries to set up special national funds for sovereign debt that is over 60 percent of gross domestic product to help build market confidence in the euro, Finance Minister Wolfgang Schaeuble said on Thursday.

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PG View: This so-called “redemption fund” has been categorized on the ZeroHedge blog as a “Hail Mary” play. As I understand it, the Debt Redemption Fund would be issuing debt to finance the newly issued sovereign debt of countries participating in the fund. It’s nothing more than a shell game.

01-Dec (The Wall Street Journal) — The sight of the world’s largest central banks acting in concert to ease funding strains in global financial markets is about as reassuring as watching an anti-tank ditch being dug. One can’t help wondering what’s coming next and how effective this defense will be.

European Commissioner Olli Rehn has said there are 10 days to save the euro, his eye on the Dec. 9 summit meeting at which we will see whether the euro zone reaches a decision to trade sovereignty for stability.

The first thing to say about the central banks’ action is that it proves that they aren’t going to sit on their hands and watch while the euro zone wrestles with itself. There is still a backstop for, as the central bankers’ parlance has it, “solvent counterparties with adequate collateral.”

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01-Dec (USAGOLD) — Gold remains well bid, but narrowly confined, after posting new 2-week highs overseas. The market euphoria provided by yesterday’s announced coordinated liquidity support for dollar swaps already seems to have been tempered somewhat by the realization that increased liquidity does not resolve any of the underlying fundamental issues. Nonetheless, that reality is unlikely to dissuade policymakers from continuing to pump liquidity and mispriced debt into the system every time there is a hint of duress.

The proliferation of paper — paper in the form of fiat currency and paper in the form of debt — has been a major driving force behind the long-term rally in gold. It would seem that those catalysts aren’t going to be withdrawn any time soon. And in fact, their use is escalating because global markets are now hooked on the “juice,” dependent on ever-larger doses.

• US ISM rose to 52.7 in Nov, above market expectations of 52.0, vs 50.8 in Oct.
• US construction spending +0.8% in Oct, above market expectations of +0.3%, vs +0.2% Sep.
• US initial jobless claims +6k to 402k for the week ended 25-Nov, above mearket expectations of 390k, vs upward revised 396k in previous week.
• UK CIPS manufacturing PMI falls to 47.6 in Nov, better than market expectations of 47.0, vs upward revised 47.8 in Oct. Weakest print in 2+ years.
• Eurozone manufacturing PMI (final) confirmed at 46.4 in Nov, in-line with expectations.
• Switzerland SVME manufacturing PMI falls to 44.8 in Mov, below market expectations, vs 46.9 in Oct.
• Switzerland Q3 GDP (sa) +0.2% q/q; 1.3% y/y, a marked slowing from downward revised 2.2% y/y in Q2.
• South Korea CPI rises to 4.2% y/y in Nov, vs 3.9% y/y in Oct.
• Thailand CPI steady at 4.2% y/y in Nov.
• China HSBC/Markit manufacturing PMI fell to 47.7 Nov, vs 51.0 in Oct: Official manufacturing PMI fell to 49.0 in Nov, vs 50.4 in Oct.

01-Dec (Financial Times) — Chinese manufacturing activity has contracted for the first time in almost three years, adding to fears about the health of the global economy.

The decline comes a day after the US Federal Reserve led a co-ordinated move to ease global liquidity concerns – particularly in Europe – and the Chinese central bank loosened monetary policy.

Chinese government data released on Thursday showed that the official purchasing managers’ index fell to 49 in November from 50.4 in October. The worse than expected fall marked the first decline since February 2009. A reading of less than 50 means the manufacturing sector has contracted.

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PG View: Our suspicion from yesterday proved accurate; that the reserve requirement cut portended bad PMI data.

30-Nov (CBS/AP) — A move by the world’s central banks to lower the cost of borrowing exhilarated investors Wednesday, sending the Dow Jones industrial average soaring 490 points and easing fears of a global credit crisis similar to the one that followed the 2008 collapse of Lehman Brothers.

It was the Dow’s biggest gain since March 2009.

Large U.S. banks were among the top performers, jumping as much as 7 percent. Markets in Europe surged, too, with Germany’s DAX index climbing 5 percent.

“The central banks of the world have resolved that there will not be a liquidity shortage,” said David Kotok, chairman and chief investment officer of Cumberland Advisors. “And they have learned their lessons from 2008. They don’t want to take small steps and do anything incrementally, but make a big bold move that is credible.”

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PG View: Yeah, stocks love big liquidity pumps and the likelihood of easier monetary policy and other accommodations to infinity and beyond.

30-Nov (Financial Times) — European finance ministers have increasingly settled on the European Central Bank as the indispensable saviour of the single currency after two days of meetings that revealed the shortcomings of other tools to fight the crisis.

The collective turn toward the ECB emerged as Italy’s new government received a dire warning from Brussels to reform its economy quickly or face a “full-blown” liquidity crisis.

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PG View: …but ECB continues to push back in effort to maintain its independence.

30-Nov (Bloomberg) — Euro-area finance ministers approved enhancements to their bailout fund while backing off from a target for its firepower and seeking a greater role for the International Monetary Fund in fighting the debt crisis.

The finance chiefs of the 17 nations using the euro agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters late yesterday in Brussels after leading the meeting.

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30-Nov (New York Times) — Much like our own recent housing crisis, the European financial mess is unfolding in a foreign language. It is the lingua franca of financial obscurity — “sovereign credit spreads” and other terms that most people don’t need, or care, to know.

Yet the bottom line is simple: Europe’s problems are a lot like ours, only worse.

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29-Nov (The Wall Street Journal) — Mexico’s central bank will begin selling dollars to support the peso on days the currency comes under heavy pressure, a move that shows how Europe’s financial crisis is forcing even the most orthodox central banks to become more active in the markets.

The Bank of Mexico will sell as much as $400 million a day in the exchange market on days when the peso is 2% weaker than the previous session, the country’s foreign exchange commission said on Tuesday.

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PG View: Banco de México is just the latest to join the cadre of interventionist central banks; but in a twist, they are moving to support their currency rather than knock it down.

30-Nov Washington Post) — Austan Goolsbee is the former director of President Obama’s Council of Economic Advisers and an economics professors at Chicago University’s Booth School of Business. On Monday, he published an op-ed on the crisis in Europe that made some provocative points, so I asked him to expand on them in an interview. I think it’s fair to say that Goolsbee is not an optimist when it comes to the euro. The problem, he says, is that even if you recapitalize the banks and end the runs on government debt, you haven’t solved the region’s growth problem.

…EK: So is there any way to hold the euro zone together?

AG: No, there probably isn’t.

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PG View: So, do you keep throwing money at Europe, hoping for an opportunity to unwinding the EMU in a controlled manner? Or does the core-Europe aversion to throwing good money after bad lead to a disorderly collapse? At which point, the individual countries try to pick-up the pieces in a reasonable time period afterwards?

30-Nov (Telegraph) — “We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” Economic and Monetary Affairs Commissioner Olli Rehn said on Wednesday as EU finance ministers met in Brussels.

His comments came as Gerard Lyons, chief economist at Standard Chartered, said: “The euro cannot survive in its present format.”

“Throughout the year I have stressed that the world economy could suffer a double-dip if it was hit by one of three factors: an external shock, a policy mistake or a loss of confidence. Unfortunately, in recent months, the euro area has been hit by all three. And that is why the euro area will slip back into recession in 2012,” he said in his Economic Outlook for November.

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PG View: Another kick of the can within ten days, or a real solution? My money is on the former…

30-Nov (USAGOLD) — Gold has rebounded to two-week highs, spurred by a cut in China’s bank reserve requirements and a coordinated move by major central banks to cut dollar swap rates by 50 bp. Oh how gold and stocks (DJIA +400 points) love liquidity and expectations of ever-cheaper credit.

The PBoC announced a 50 bp cut in the reserve requirement ratio for banks from 21.5% to 21.0%, effective December 5. This was the first cut to the reserve ratio since 2008 and is being broadly interpreted as confirmation of a new round of global easing, ushered in by the surprise ECB rate cut this month. Expectations are rising for another 25 bp refi rate cut by the ECB next week amid heightened economic turmoil in the eurozone. Then the FOMC meets on 13-Dec. With the Fed funds rate already essentially at 0%, there is no room for the US central bank to move on rates, but they certainly could offer other forms of monetary accommodations, such as additional quantitative measures.

The Fed, in conjunction with the ECB, BoJ, SNB, BoE and BoC, announced a coordinated move to cut dollar swap rates by 50 bp. Rumors immediately began circulating that the Fed would likely cut the discount rate by 25 bp, possibly in advance of the FOMC meeting, to align the domestic lending rate with the new lower swap rate.

So you may ask: Why continue down the path of liquidity injections and cheap credit, when they have proven to be largely ineffective at getting the global economy back on track? The answer of course is that easy monetary policy is comparatively easy to accomplish and it absolves politicians — and individuals for that matter — from making some very difficult choices…at least for a while. Perpetuation of this long-standing reality bodes well for the long-term uptrend in gold.

• US ADP employment survey +206k in Nov, well above market expectations of +130k, vs upward revised 130k in Oct.
• Chicago ISM rebounded to 62.6 in Nov, well above market expectations of 58.5, vs 58.4 in Oct.
• US NAR pending home sales surged 10.4% to 93.3 in Oct, vs 84.5 in Sep.
• Fed, ECB, BoJ, BoE, SNB, BoC agree to coordinated 50bp cut to dollar swap rates.
• Germany retail sales better than expected at 0.7% m/m in Oct, but y/y pace falls to -0.4% from 0.6% in Sep.
• France producer price index rises to 0.5% m/m in Oct, vs upward revised 0.3% in Sep; 6.5 y/y, down from significant upward revised 6.8% y/y in Sep.
• German unemployment rate ticks lower to 6.9% on -20k drop in unemployed in Nov.
• Eurozone unemployment rate ticks higher to 10.3% in Nov.
• Eurozone consumer price index – Flash Estimate steady at 3.0% y/y in Nov, just above expectations.
• India GDP falls to 6.9% y/y pace in Q3, vs 7.7% y/y in Q2.
• Japan housing starts -5.8% y/y in Oct, up from -10.8% y/y in Sep.
• Japan construction orders 24.3% y/y in Oct, up sharply from -9.3% y/y in Sep.

by Mohamed El-Erian
30-Nov (FT Alphaville) — Risk markets love liquidity injections, real and perceived. As such, they will welcome today’s announcement by six major central banks to reduce the price of emergency financing and broadening its scope. They will also like the possibility that this dramatic coordinated move provides a stronger context for further actions at the level of individual institutions.

In justifying the move, the central banks point to the need to counter pressure on “the supply of credit to households and businesses and so help foster economic activity.” This is an objective that will sell well to the public and politicians. But it is not one that will be effectively met by the announced measures.

…The immediate impact on markets unambiguously favors risk assets across the world. The longer-term effect depends on the scale and scope of the follow through from others.

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Fed press release on coordinated central bank “liquidity support”:

30-Nov (Board of Governors of the Federal Reserve System) — The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013.

Federal Reserve Actions
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

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PG View: US 2-year dollar swap spreads are only off about 10 bp, while the 10-year swaps have only narrowed by 3 bp thus far. Nonetheless, the markets love the notion of more liquidity, along with rising expectations of further global policy easing.

29-Nov (Bloomberg) — Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the world’s biggest lenders.

S&P made the same cut to Morgan Stanley and Bank of America’s Merrill Lynch unit today. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. to A from A- and maintained the A rating on Industrial & Commercial Bank of China Ltd. (1398), giving all three lenders higher grades than most big U.S. banks.

The moves may increase pressure on firms already dealing with weak economies and Europe’s mounting sovereign debt crisis.

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30-Nov (Bloomberg) — European stocks rose, reversing earlier declines, after China said it will cut the amount of cash that banks must set aside as capital for the first time since 2008. U.S. index futures rallied, while Asian shares fell.

…China will cut the reserve requirement ratio for banks by 0.5 percentage points from Dec. 5, according to a statement on the central bank’s website today.

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PG View: The latest hint that a new round of global monetary easing may be ramping-up saw gold surge to 2-week highs as well. ECB is next up for a likely rate cut next week…

JK Comment: In the vein of the now famous video “Quantitative Easing Explained”. Very entertaining, and enlightening.

29-Nov (USAGOLD) — Gold continues to consolidate above the 1700 level, just below the midpoint of the broad range, as the rumor-mill in Europe continues to churn. Yesterday there was speculation that the IMF would be bailing out Italy to the tune of €600 bln. Today, the rumor from last week that the ECB will lend funds to the IMF so they can bailout Italy is being recirculated. Neither is rather likely, but stock markets continue to latch on to any kind of hope.

To punctuate the need for something to happen — and happen quickly — Italy auctioned bonds today with rather troubling results. The yield on 3-year bonds neared 8% and the 10-year auction netted a euro-era high yield of 7.56%. The bid covers were just 1.5 and 1.34 respectively.

Adding insult to injury, the ECB was unable to sterilize the entire €203.5 bln in accumulated bond purchases it had outstanding. This has happened before, but it suggests that the current secondary market bond buying scheme may be reaching its limit. If the ECB is to continue buying bonds of meaningful quantities — and the latest Italian auctions suggest higher volumes are needed — the central bank may have to concede that full-on quantitative easing is necessary. The latest Reuters survey of economists suggest there is now about a 40% chance the ECB will succumb to the ‘need’ for QE.

• US consumer confidence surged to 56.0 in Nov, well above market expectations of 43.0, vs upward revised 40.9 Oct.
• US S&P Case-Shiller home price index for 20-cities -0.6% (nsa) in Sep; -3.59% y/y.
• Canada Q3 current account deficit narrowed to -C$12.1 bln, on expectations of -C$11.1 bln.
• Eurozone economic confidence fell to 93.7 in Nov, below market expectations of 94.0, vs 94.8 in Oct.
• Eurozone consumer steady at -20.4 in Nov; Business climate and services confidence erode.
• UK GfK consumer confidence ticks lower to -33 in Nov.

29-Nov (Reuters) — Greece’s bank deposit outflows reached 13-14 billion euros in the September-October period, the country’s central bank chief said on Monday.

“In September and October, two very bad months due to political uncertainty, we had a loss of 13-14 billion euros,” Bank of Greece Governor George Provopoulos told a parliamentary committee.

Provopoulos said bank deposit outflows continued in the first 10 days of November.

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29-Nov (CNBC) — The European Central Bank will cut interest rates next week and throw more funding lifelines to stressed banks toiling against the euro zone’s debt crisis, according to a firm majority of economists polled by Reuters.

While Europe’s leaders spar over ways to tackle the crisis, the poll suggested that under its new President Mario Draghi the ECB will act more decisively, perhaps through unconventional means.

The survey of 73 analysts showed a 40 percent chance the ECB will follow the U.S. and British central banks in the next six months and start purchasing government bonds from struggling euro zone economies using freshly created money—or quantitative easing (QE).

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