24-Jan (TheHill) — Senate Republicans slammed their Democratic colleagues on Tuesday for not passing a budget in exactly 1,000 days, accusing Democrats of shirking their duty in a period of soaring deficits.

Four senators at a Tuesday news conference said President Obama should be more of a leader on reining in deficits. GOP lawmakers have for months pointed out the time elapsed since the Senate last passed a budget.

“It is imperative that we get our federal budget under control and the first step – the minimum thing that Congress should do – is follow the law that it passed to put discipline on itself,” said Sen. Ron Johnson (R-Wis.), who also called the lack of a Senate budget “a national scandal.”

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24-Jan (Financial Times) — The European Central Bank and other public sector holders of Greek sovereign debt must participate in the same voluntary restructuring as private sector bondholders, the Institute of International Finance has demanded.

The IIF, which represents banks and other private sector Greek sovereign bondholders, said a failure to do so would be a betrayal of principles agreed at an October 26 summit of policymakers which thrashed out the broad terms of a deal centred on a 50 per cent haircut of the bonds’ value.

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24-Jan (Bloomberg) — The International Monetary Fund cut its forecast for the global economy as Europe slips into a recession and growth cools in China and India.

The world economy will expand 3.3 percent this year and 3.9 percent in 2013, compared with September forecasts of 4 percent and 4.5 percent, the IMF said. The euro area may enter a “mild recession” this year and contract 0.5 percent compared with a previous estimate of a 1.1 percent expansion. The U.S. outlook was held at 1.8 percent growth.

“The near-term outlook has noticeably deteriorated,” the IMF said in an update of its World Economic Outlook report. “The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere.”

The forecasts hinge on increased efforts in the 17-country euro area to fight the financial turmoil, which the IMF calls the “most immediate policy challenge.” The report called on European policy makers to increase the size of the region’s rescue fund and for the European Central Bank to continue its support of the region to limit contagion to other countries.

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22-Jan (Reuters) — The Federal Reserve could take the historic step this week of announcing an explicit target for inflation, a move that would fulfill a multi-year quest of the central bank’s chairman, Ben Bernanke.

An inflation target would be the capstone of Bernanke’s crusade to improve the Fed’s communications, an initiative aimed at making the central bank more effective at controlling growth and inflation. It would, at long last, bring the Fed into line with a policy framework used by most other major central banks.

…Officials say that while monetary policy ultimately determines the rate of inflation, labor markets are often affected by structural issues beyond the central bank’s control. Because of that, they are hesitant to put a fixed number on the level of unemployment that can be achieved without generating a self-defeating inflation.

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24-Jan (USAGOLD) — Gold is in retreat as renewed concerns about Greece temper risk appetite. The euro has retreated, bolstering the dollar in the process. EUR-USD has fallen back below 1.3000.

The Eurogroup has rejected the latest Greek debt swap deal, arguing that the coupon is too high. Basically, policymakers in Europe want private bondholders to “voluntarily” accept a 68% haircut and a coupon on their new bonds somewhere around half of the current market rate (which itself is probably reflective of mispriced risk). Meanwhile, S&P has said that they will likely downgrade Greece to “selective default” once these ridiculous negotiations are concluded.

The dollar is also getting an assist from yen weakness after the BoJ came out with a weaker view of the Japanese economy. The BoJ says the eurozone crisis is having a negative impact on Japan’s recovery and will likely lead to contraction this fiscal year.

The Fed is expected to further refine their communications at the end of a 2-day FOMC meeting that begins today.

Silver is consolidating recent strong gains; trading within Monday’s range.

• Canada retail sales +0.3% in Nov, above market expectations of +0.2%, ex-autos +0.3%.
• Eurozone Markit PMI – Composite rose to 50.4 in Jan, above market expectations of 48.6, vs 48.3 in Dec; Manuf 48.7, Services 50.5.
• Eurozone Industrial Orders -1.3% m/m in Nov, above market expectations of -2.0%, vs negative revised 1.5% in Oct; -2.7% y/y.
• BoJ holds overnight call rate steady at 0%-0.1%; Asset purchase target steady at ¥20 trillion.
• RBI holds repo rate steady at 8.5%.

24-Jan (Reuters) — Standard & Poor’s will likely downgrade Greece’s ratings to “selective default” when the country concludes its debt restructuring, but that will not necessarily destroy the credibility of the European Union, an official with the ratings agency said on Tuesday.

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24-Jan (CNNMoney) — Greece and its creditors in the private sector are grappling over a key detail of a deal aimed at reducing the nation’s overwhelming debt load, according to a top eurozone official.

Disagreements remain over the interest rate private investors will be paid on new bonds they receive in exchange for existing Greek government debt, said Jean-Claude Juncker, who heads the Eurogroup of finance ministers from the 17 nations that use the euro.

…The European Union has stipulated that the interest rate on the new bonds must be “clearly below 4%” in order for Greece to reach its long-term debt reduction target, said Juncker. But the terms being discussed imply interest rates “well beyond 3.5% before 2020,” he added.

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PG View: A yield below 4% clearly fails to accurately reflect the risk of an investment in Greece. The private bond holders recognize this but the Eurogroup finmins know that an accurately priced bond means Greece will default. PIMCO’s Bill Gross, thinks Greece goes broke anyway. One thing is certain, calling this deal “voluntary” — while maintaining a straight face — must be getting really difficult.

Silver Leads Gold to a Strong Weekly Close

20-Jan (USAGOLD) — Gold is well bid going into the weekend, poised to post its third consecutive higher weekly close; with silver leading the way. The yellow metal has been underpinned by relative calm in Europe this week, amid much back slapping that the ECB’s massive LTRO several weeks ago is proving to be a “game changer” after all. Additionally, many continue to believe that the Fed may be forthcoming with further accommodations — focused on the housing market — when the FOMC meets on Tuesday and Wednesday next week.

When the ECB pumped an astounding €489 bln in cheap money into the banking system late in 2011, at least initially the banks turned around and deposited it right back with the central bank. That’s not exactly what the ECB had in mind and they were forced to ramp up their bond buying in the secondary market to prevent periphery yields from blowing out. This past week however, bank interest in the periphery bond market finally materialized, perhaps as a result of some arm twisting in the wake of last week’s S&P downgrades. Concerns about this week’s auctions proved unfounded and sovereign spreads narrowed.

So congratulations to the ECB — and the self-serving banks that are playing along — you solved the short-term funding crisis. However, the underlying debt crisis remains. The massive debt overhang, both in the periphery and in core Europe, is still there. It ain’t going anywhere, amid persistent worries of a new recession and ongoing calls for austerity. The LTRO did nothing but buy some time; another kick of the can as it where. Once Europe catches up to the proverbial can again, the debt crisis may in fact be even bigger. Do they kick the can again?

In fact, another 3-year LTRO is already queued up for 29-Feb, where an even broader range of collateral is expected to be deemed acceptable. Certainly all that periphery debt bought this week will be pledgeable as collateral for even more euros at 1%. And why not? If it worked once, it’ll work again… Right?

Speculation is that this next operation will make the initial €489 bln LTRO look like chump-change. How does €1 trillion (~$1.29 trillion) grab ya? So goes the market chatter.

Throw some more quantitative easing from the Fed into the mix and one might surmise that it may be about to rain fiat currency. Generally tepid inflation data this week added to the sense that the central banks do indeed have some maneuvering room. Noted Fed watcher Jon Hilsenrath of The Wall Street Journal seems to think that additional Fed accommodation wont be forthcoming next week. However, there seems to be feeling within this more dovish FOMC that “if inflation falls below 2% and shows signs of staying there, more bond purchases would be justified.” If not next week, probably sooner rather than later.

Finally, take note of today’s sterling performance of silver; pushing above $31 for the first time in six-weeks and extending above 31.90 as stop loss orders got run. Silver leaves the 50-day moving average in the dust. Next resistances to watch are the 100-day MA at 32.64, the high from late-Nov at 33.65 and 38.2% Fibonacci retracement of the entire collapse from 49.78 to 26.04, which comes in at 35.10. Be aware that a breakout in silver (being a more speculative metal) often precedes similar activity in gold.

Daily Silver Chart

Daily Gold Chart with Silver Overlayed

Have a great weekend!

by Jon Hilsenrath
20-Jan (The Wall Street Journal) — Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.

The Fed meets again next Tuesday and Wednesday, and officials are preparing to roll out a new communications strategy that is on track to include two key elements: their interest-rate projections and a statement explaining their objectives for inflation and employment.

Clarifying the central bank’s objectives could make easier the tasks of deciding whether to buy more bonds and explaining their reasons.

The Fed has purchased more than $2 trillion of securities since the crisis began…

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20-Jan (Bloomberg) — European Central Bank President Mario Draghi’s unlimited three-year loans to euro-region banks may give Italy and Spain only temporary respite from the region’s debt crisis.

Two-year Italian and Spanish notes rallied since the ECB said Dec. 8 that it planned to offer as much liquidity as banks wanted in exchange for eligible collateral. The gain on the short end of the market outpaced longer-dated debt on concern the nations’ austerity plans won’t plug deficits and reduce Europe’s largest debt load. Yields on Italian two-year notes fell to the least relative to 10-year bonds in 21 months.

“This is about buying time,” said John Davies, a fixed- income strategist at WestLB AG in London. “It’s only when the market believes Italy and Spain have returned to sustainable debt levels that you can say the crisis has truly ended.”

…“For the time being, the ECB’s operations are working at the short end, but for the long end, we have a lot of uncertainties around,” said Frankfurt-based Werner Fey, a fund manager at Frankfurt Trust Investment GmbH, which oversees the equivalent of 6.5 billion euros of fixed-income assets.

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19-Jan (Financial Times) — Investors bought inflation-protected Treasury securities at a negative interest rate for the first time on Thursday, demonstrating the depth of concerns that Federal Reserve efforts to stimulate the economy could lead to higher inflation in the future.

The $15bn in Treasury inflation protected securities, or Tips, were sold at a negative yield of about 0.046 per cent. Investors could still make money on their holdings because the principal of such securities increases if inflation rises.

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19-Jan (CNBC) — The Federal Reserve is likely to step in with $1 trillion worth of easing that could be announced as soon as this month, according to a growing consensus of economists who see the recent uptick in economic growth as unsustainable.

With the Fed’s Open Market Committee set to meet next week, expectations are rising that the languishing housing market will drive the central bank to buy up mortgage-backed securities.

The goal of the purchases will be to drive down interest rates even further from current record-low levels, and, less obviously, to spur confidence that more monetary tools remain to stimulate the economy.

Of course, the announcement also could push stock prices higher, as did the Fed’s last balance sheet expansion begun in November 2010.

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PG View: One can reasonably expect such a move would drive gold higher as well.

19-Jan (USAGOLD) — Gold eked out a new 4-week high at 1669.70 in overseas trading before retreating back within the range. A generally softer tone in the dollar is seen as broadly supportive to the yellow metal as is heightened talk of possible further Fed accommodations to support the moribund economy.

The perception is that tepid inflation data gives the central bank room to do more as growth prospects continue to languish under the burden of an oppressive and growing debt load, along with ongoing uncertainty surrounding Europe. While today’s news that initial claims fell by 50k is encouraging on the surface, drilling a little deeper into the data leaves you with a sense that the jobs picture remains quite clouded. While both initial and continuing claims are trending gradually lower, so is the labor force participation rate. Any headway that we might be making on the headline numbers is simultaneously being eroded behind the scenes.

The market appears largely nonplussed about that big headline number, in part because of disappointing Dec housing starts. Starts fell 4.1% in in Dec, a bigger slow-down than was expected, offsetting the pretty decent print seen in Nov. Continued weakness in housing may also incite Fed action. In fact, much of the recent speculation about likely Fed action has centered on move back into the MBS market.

The FOMC holds a two-day meeting nest week on Tuesday and Wednesday.

• Philly Fed index rose modestly in Jan to 7.3, below market expectations of 11.0, vs a big downward revision in Dec from 10.3 to 6.8.
• US CPI unch in Dec, below market expectations of +0.1%; core +0.1%, in-line with expectations.
• US housing starts -4.1% in Dec to 657k pace, below market expectations of 676k.
• US initial jobless claims -50k to 352k in the week ended 14-Jan, well below expectations of 385k, vs upward revised 402k in previous week.
• Eurozone current account (sa) -€1.8 bln in Nov, vs -€6.6 bln in Oct; +€1.0 bln (nsa).
• New Zealand Q4 CPI -0.3%, vs +0.4% in Q3.
• Australia employment -29.3k in Dec; unemployment rate steady at 5.2%.
• Philippines central bank cuts overnight borrowing rate by 25bps to 4.25%.
• Hong Kong unemployment rate (sa) ticked lower in Dec to 3.3%, vs 3.4% in Nov.

We’ve Heard it All Before…

18-Jan (USAGOLD) — The IMF needs more money, the Greek deal is just about to go through, and the US needs to raise the debt ceiling…again. All of those things should sound painfully familiar:

The IMF said today that they need to raise an additional $600 bln to bolster their bailout fund. Of course the IMF members are for the most part exactly the same countries that are in need of the bailouts. Rather than pledging it to the IMF and having it potentially go elsewhere, cash strapped members would probably be better served marshaling any limited resources they might have and applying it prudently in the hope of bettering their own situation.

The US is the largest contributor to the IMF and our ability to print an endless amount of dollars is certainly appealing in an environment where almost everyone is under some form of fiscal duress. However, increasing our contribution to the IMF needs to pass through Congress and there is no way it would ever get approved, especially in an election year. The response from the Treasury Department was swift an unequivocal according to this Dow Jones headline: US Treasury Says No Intention To Seek Additional Resources For IMF.

Quite frankly it was silly of Mme. Lagarde to ask. Unless of course the intent was to cast the US as being part of the problem, rather than part of the solution. So when the wheels fall off in Europe, with adverse global repercussions — including in the US — the IMF has a scape goat: If only America had been willing to chip-in a little more…

There are reports again today that an agreement between Greece and private holders of Greek debt is hand. The latest proposal calls for those bondholders to get about 32 cents on the euro, plus some longer-term debt. That 68% scalping is a far cry from the 50% haircut the bondholders allegedly “volunteered” for back in October. They’re still apparently haggling over the coupon on the longer-term debt, which is exactly what caused the talks to breakdown late last week.

Finally, the US Congress is expected to hold symbolic votes to disapprove of President Obama’s request to raise the debt ceiling by another $1.2 trillion. As part of the contentious debt ceiling debate last year, Republicans secured the ability to vote on so-called “resolutions of disapproval” when a debt ceiling hike is requested. This allows them to be “on the record” as against a hike, but there’s no way for them to actually block it. Even if such a measure made it through the Democrat controlled Senate, it would be vetoed by the President and the debt ceiling would get raised anyway. It’s political theater at its finest.

It’s also worth noting that Dec TIC data released data revealed ongoing foreign selling of US Treasuries. China reduced its holding of Treasuries in Nov to $1,132.6 bln, the lowest level in more than a year and down 2.7% from a year ago. Switzerland was the largest seller, shedding $17.8 bln in US debt in Nov. However, the most relentless seller remains Russia, which has nearly halved its Treasury holdings in the past year to a mere $90 bln.

It remains to be seen, when the bond market will start to react accordingly. The turmoil in Europe continues to drive investors into the perceived safety of US debt, but clearly some aren’t buying into the “safety” narrative. Interestingly, China and Russia are two of the most aggressive buyers of gold. A reallocation from low yielding bonds and the associated currency risk into gold strikes me as pretty prudent. The dwindling foreign demand for our debt will ultimately factor into the Fed’s decision to ramp up the “artificial demand” that they provide through quantitative measures. When that happens, the long standing uptrend in gold is likely to re-exert itself with a vengeance.

18-Jan (MNI) — Yet another record sum parked at the European Central Bank’s overnight deposit facility highlights ongoing market tension and could reignite concerns that the central bank’s massive liquidity injections are failing to spur lending.

On Wednesday, Eurozone banks deposited a new record high of E528 billion overnight with the ECB, up from E502 billion the previous day. Levels have spiked ever since the ECB injected nearly E490 billion of 3-year loans into the banking system just before Christmas in an effort to avoid a credit crunch in the euro area.

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18-Jan (BusinessInsider) — So the ratings agencies have finally followed through on the big threat and downgraded a number of the eurozone’s credit ratings, including France and Austria, both of which have now lost their coveted Triple AAA status. Italy, Portugal and Spain were downgraded a further two notches.

…But note the way the ECB balance sheet is expanding: The consolidated assets of the European system of Central Banks is now 4.4 billion euros or $5.7 billion. In effect, the consolidated ESCB balance sheet is almost two times that of the Fed and its increase over the last 6 months is almost equal to the entire increase in the Fed’s balance sheet over the last several years.

The figures on the ESCB balance sheet neither includes the recent half billion euro Long Term Refinancing Option (LTRO) introduced last December, nor further mooted policies in that direction. CLSA has suggested that the speculation on the February 29th LTRO is EUR1trn. Some have suggested even higher numbers.

Bottom line: the system of European Central Banks (ESCB) has been engaged in massive QE and much more is in the pipeline.

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