13-Mar (FRB) — Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

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13-Mar (The Wall Street Journal) — U.S. Federal Reserve officials held their course Tuesday, taking no new actions and offering few hints about their willingness to embark on future programs to bolster the economic recovery.

In their assessment of the U.S. economy, the central bank officials acknowledged improvements in the labor market, but cautioned that economic risks remain and that inflation could rise temporarily because of the recent increase in oil and gas prices.

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13-Mar (USAGOLD) — Gold slipped deeper into the range in early New York trading, weighed by fresh dollar gains as the euro slipped to new 4-week lows. A generally stronger dollar tone has emerged recently amid ongoing worries over events in Europe. The greenback also got a boost yesterday when the PBoC sharply lowered the midpoint of the yuan range against the dollar in reaction to the troubling swing to a trade deficit.

Despite the dollar’s gains, stocks are being supported by an ever-so slightly better than expected retail sales print for February, and a favorable revision to January’s data. While business inventories grew more than expected in January as well, shipments rose by a similar amount, leaving the I/S ratio unchanged for a 6th consecutive month. When the dollar and stocks are higher simultaneously, generally gold is going to be suppressed. However, much of those early losses have already been retraced, leaving support at 1677.50 well protected.

Now the market’s attention will turn to the Fed’s FOMC statement at 18:15 GMT. The FOMC is not expected to significantly alter its policy statement today, although recent talk of “sterilized” bond purchases will have all the Fed watchers trying to read between the lines with regard to likelihood and timing. No discernible indication of impending additional quantitative measures may deflate the stock market somewhat, which could offer a later boost to gold.

• US business inventories +0.7% in Jan, above market expectations of +0.5%, vs upward revised +0.6% in Dec.
• US retail sales +1.1% in Feb, near market expectations of +1.0%, vs upward revised +0.6% in Jan; 0.9% ex-autos.
• CPI for Feb: France 2.3% y/y. Spain 2.0% y/y. Italy 3.3% y/y. Sweden 1.9% y/y.
• UK Trade Balance – Visible -£7.5 bln in Jan, inside market expectations of -£7.8 bln, vs downward revised -£7.2 bln in Dec.
• Germany ZEW Economic Sentiment surged to 22.3 in Mar, well above expectations of 10.0, vs 5.4 in Feb; current situation falls to 37.6, vs 40.3 in Feb.
• Russia trade surplus ticks higher to $20.5 bln.
• Japan Tertiary Industry Index (sa) -1.7% m/m in Jan, vs upward revised 1.8% in Dec.
• BoJ hold steady on Target Overnight Call Rate at 0%-0.1%, in-line with expectations.

13-Mar (Reuters) — Japan said on Tuesday it had received approval from China’s government to purchase 65 billion yuan ($10.3 billion) in Chinese government debt in a move that can help Japan diversify its reserves away from the dollar and strengthen economic ties between the two Asian countries.

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12-Mar (The NY Sun) — When I was collecting my annual tax forms to send to my accountant earlier this month, I couldn’t find one — the one called the Form 1099-INT. That’s the form I’ve gotten in past years from banks or mutual fund companies to report interest I’ve received on bank accounts or money market funds.

The form didn’t seem to be downloadable from the bank or mutual fund Web sites, either, so I finally called up and asked a call center representative where my form 1099-INT was. Wearily, she explained that the bank doesn’t have to issue the form if an account generates less than $10 in annual interest. Lots of other callers, she said, had been asking the same question, and getting the same response.

It’s not that I have less money in the bank than I used to. Okay, maybe a little less. The point, though, is that the Federal Reserve’s zero interest rate policy — “zirp,” for short — means that whatever I do have in the bank isn’t generating much interest. And that’s part of the reason I’ve got less money in those bank accounts.

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11-Mar (Bloomberg) — As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.

Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.

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PG View: If the attack on savers is here to stay, it would certainly be prudent to protect at least a portion of your savings by choosing to save in gold.

Gold Weakens on China Concerns

12-Mar (USAGOLD) — Gold is under modest pressure on Monday, having been unable to sustain the rebound back above $1700 late last week. Aside from the normal raft of economic issues domestically and in Europe and Japan, concerns about China are starting to mount.

China reported $31.5 bln trade deficit in February as a result of much higher than expected imports. Import growth surged to 39.6% y/y, while export growth was less than half that amount at 18.4%. This was the biggest reported deficit in 22-years. The PBoC reacted immediately by setting the midpoint of yuan’s acceptable trading range sharply lower at 6.3282. It was the second biggest one day cut on record.

A Reuters article said, “Traders and analysts said the PBOC appears to be preparing the domestic and global markets for sharper fluctuations to eventually widen the yuan’s daily trading band.” Given that it happened on the same day that a large trade deficit was reported, call be suspicious. I think they were simply sending the signal that China intends to keep its goods and services relatively cheap, by constraining the upside in the yuan.

The reaction in gold was somewhat muted because the undertone of a slowing Chinese economy is that the PBoC will move toward an easier stance with perhaps a healthy dose of fiscal stimulus to boot. This is consistent with the steps taken by the Western economies in recent years; the central banks push rates lower and offer accommodations, and if necessary the government provides fiscal stimulus as well. While the political will for further direct stimulus has waned significantly in the West — as the political landscape has shifted — that’s not of any particular concern in a country like China; that is until inflation rears its ugly head. If China jumps back on the already crowded bandwagon of monetary accommodations, bailouts and stimulus, just imagine what the longer-term inflationary repercussions might be.

The Fed’s FOMC meets tomorrow in a one day meeting. Rates are on hold at 0% at least through late-2014. There was some escalated discussion last week about the possibility of QE3 in the wake of one-day retreat in the stock market. I think that’s reflective of just how edgy investors are right now. As evidenced by a WSJ article and a Washington Post article today, people are beginning to wonder if recent gains on the employment front are sustainable in light of the continued sluggishness in economic growth. While the Fed may not announce new quantitative measures tomorrow, pressure is already building for them to do more.

12-Mar (The Wall Street Journal) — Something about the U.S. economy isn’t adding up.

At 8.3%, the unemployment rate has fallen 0.7 percentage point from a year earlier and is down 1.7 percentage points from a peak of 10% in October 2009. Many other measures of the job market are improving. Companies have expanded payrolls by more than 200,000 a month for the past three months, according to Labor Department data. And the number of people filing claims for government unemployment benefits has fallen.

Yet the economy is barely growing.

…How can an economy that is growing so slowly produce such big declines in unemployment?

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PG View: Finally, the economists and journalist are starting to question what most people in the real-world have been experiencing all-along; that things out here in the real-world aren’t really improving in any meaningful way.

12-Mar (The Wall Street Journal) — China’s trade sector fell deeply into the red last month after running huge trade surpluses for much of a decade, raising questions about whether the country’s economy is tailing off more rapidly than anticipated.

The weekend report of a $31.5 billion trade deficit in China for February was substantially larger than most analysts expected and followed a string of other disappointing economic data, including weak growth in car sales, industrial production and retail sales, and the continuation of a steep fall in property sales. The only bright economic star was that inflation slackened more rapidly than expected.

…The overall results prompted analysts to predict that China will ease monetary policy over the coming months to bolster growth—but few expect a package remotely on the scale of the stimulus spending and lending that occurred in 2009 and 2010 in response to the global financial crisis.

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12-Mar (Financial Times) — Greece’s new bonds, issued after its €206bn debt exchange, started trading on Monday at distressed levels, indicating that investors fear another restructuring is probable.

A series of 20 bonds with maturities of 11 to 30 years began trading and were quoted with prices of between 23 and 26.5 cents in the euro, a slight rise from Friday’s grey market.

Greece’s yield curve is still inverted with the 11-year bond yielding about 18.1 per cent and the 30-year bond 13.4 per cent, meaning investors are braced for more distress.

The new yields are the highest in the eurozone, ahead of Portugal, the country considered most likely to follow Greece in needing a second bailout.

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PG View: As I’ve been saying for weeks, the likelihood of Greece making good on the new bonds isn’t really any better. That makes the PSI “volunteers” appear even more the patsies, unless of course there was coercion from the get-go…

12-Mar (Reuters) — The People’s Bank of China (PBOC) set the yuan’s midpoint against the dollar sharply lower on Monday, the second biggest single-day fall on record and the latest signal that China is willing to let its currency move within a wider range.

…Traders and analysts said the PBOC appears to be preparing the domestic and global markets for sharper fluctuations to eventually widen the yuan’s daily trading band.

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09-Mar (Reuters) — Greece triggered the payment on default insurance contracts by using legislation that forces losses on all private creditors, the International Swaps and Derivatives Association said on Friday.

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Gold Recoups This Week’s Losses

09-Mar (USAGOLD) — Gold has traded in a choppy manner, falling in early New York trading after a modestly better than expected nonfarm payrolls report lifted the dollar and stocks. The purported success of the Greek PMI deal may have also diminished the safe-haven appeal of the yellow metal somewhat.

However, these intraday losses were short-lived as news that Fitch downgraded Greece to “selective default” and reports of an Israeli airstrike in Gaza sparked a rebound that saw gold set new highs for the day and threaten the high for the week at 1716.48. A close above the 100-day moving average (1695.66), and more so a higher close on the week (above 1710.50), would offer encouragement to longs for the week ahead. Such action into the close would also likely discourage shorts.

Despite reports of 95% participation in the Greek bond swaps, the euro tumbled back to its low for the week, just below 1.3100 versus the dollar. The Greek cabinet approved activation of the collective action clauses and Fitch downgraded Greece to selective default status. Meanwhile, in the grey market for the new bonds, it appears that the actual haircut for the private bondholders will be closer to 78%. Yields have surged from the get-go with new 2% bonds maturing in Feb 2023 being bid at 19.7% on repayment worries. Basically, the new bonds aren’t even out yet and already there’s ample skepticism about Greece’s ability to pay on them.

Such skepticism is well founded with news that the Greek economy contracted more than expected at the end of last year. The Hellenic Statistical Authority reported today that Q4 GDP fell by 7.5%, rather than the 7% that was initially estimated.

Here in America we’ve started seeing some downward revisions to GDP for this year that are primarily being driven by a surging trade deficit. The January trade deficit jumped to a three year high of $52.6 bln on rising costs for imported energy and food products. At the same time, European demand for our exports fell as their economy teeters on the brink of a new recession. The weaker economic prospects for the US may have prompted the Fed to spur renewed speculation this week about additional quantitative measures.

If the Fed does indeed launch a QE3 down the road, the gold market is likely to react in the same way it did to QE1, QE2 and Operation Twist, by pushing relentlessly higher. When you consider the absolute explosion in the balance sheets of the Fed’s peers — the ECB, BoE, BoJ, among others — it’s reasonable to view gold as being on sale at these prices.

09-Mar (SmartMoney) — The stock market has recovered its losses since hitting bottom three years ago today. But despite gains in employment during that same stretch, America is still down six million jobs, data shows.

The economy added 227,000 jobs in February, more than the 204,000 economists expected, the Labor Department reported this morning. The unemployment rate remained unchanged at 8.3% from last month. But while the economy has added more than 200,000 jobs for three straight months, the damage to employment done by the Great Recession is still far from repaired.

Between December 2007, when the recession officially started, and February 2010, when the Labor Department’s reports show employment hit bottom, the economy lost more than eight million jobs.

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PG View: While limited progress is certainly better than no progress — or worse yet, higher joblessness — there’s still a huge gap to fill.

A great interview with Jim Grant of Grant’s Interest Rate Observer, where he discusses how past, present and future quantitative measures are nothing short of market manipulation.

Grant also advocates for a “sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C.”

Yes, Jim believes gold needs to be part of that conversation…

09-Mar (Bloomberg) — Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second bailout.

Euro-region finance ministers agreed on a conference call that the swap meant Greece had met the terms to proceed with a 130 billion-euro rescue package designed to prevent a collapse of the Greek economy. Ministers freed up 35.5 billion euros in public sweeteners and interest now, with a decision on the balance to be made at a March 12 meeting in Brussels.

“It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”

…Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after so-called collective action clauses are triggered, the Finance Ministry said.

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09-Mar (Reuters) — Grey market trading on the new Greek bonds suggest long-suffering bond holders will receive an approximate net present value loss of 78%, as opposed to the approximate 75% NPV loss Athens negotiated with private sector creditors.

There is a wide price range being quoted in the grey market, but the new Greek 2042 bond is averaging a mid-market around EUR18.75 (yielding around 17%).

The new bonds are not starting from a nominal par value as is typically the case on new issues. Instead, as Greece’ Ministry of Finance has previously specified, they are being issued with a “face amount equal to 31.5% of the face amount of the debt exchanged”. In other words, the grey market trading around EUR18.75 should be viewed as a discount not from par but from 31.5, meaning they are already trading at a discount of 59.5%.

Totalling it up, we find that instead of an approximate 75% Net Present Value loss, holders of Greek bonds will instead receive an approximate NPV loss of 78%.

…The difference of course is only a mark-to-market loss; investors could hold onto the new paper, but clearly the market is already starting to price in further discounts/haircuts at a later date.

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08-Mar (Gallop) — U.S. unemployment, as measured by Gallup without seasonal adjustment, increased to 9.1% in February from 8.6% in January and 8.5% in December.

The 0.5-percentage-point increase in February compared with January is the largest such month-to-month change Gallup has recorded in its not-seasonally adjusted measure since December 2010, when the rate rose 0.8 points to 9.6% from 8.8% in November. A year ago, Gallup recorded a February increase of 0.4 percentage points, to 10.3% from 9.9% in January 2011.

…Gallup’s U.S. underemployment measure, which combines the percentage of workers who are unemployed and the percentage working part time but wanting full-time work, increased to 19.1% in February from 18.7% in January. This is an improvement from the 19.9% of February 2011.

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