March 3. ECB leaves rates UNCH’d

Interest rate futures gave up early gains after the Beige Book, where the gen’l theme seems to be that companies are trying to pass on higher input costs. Comments attributed to purchasing mgrs in the last ISM report note higher costs and longer lead times for acquiring inputs. When concerned about both cost and supply, the natural reaction is to stockpile inventory. If the Fed had only price stability as a mandate, then rates would already be rising, and the oil price shock (up another $2 yest) would only support the case for rate hikes.  This morning’s ECB meeting is expected to lean that way; it’s expected the inflation estimate will be increased to 2%. 
–However, the Fed has repeatedly said the recovery can’t be complete without improvement in the labor markets (Job Claims expected 395k). And geopolitical tensions are spreading, threatening the economic outlook. For example, in Pakistan a Christian politician was assassinated, in Saudi Arabia a man who had tried to organize a “Day of Rage” was killed, and Libya continues to boil.

www.reuters.com/article/2011/03/03/us-pakistan-assassination-idUSTRE72216Z20110303
(Reuters) – Pakistan is being swept toward violent chaos by a growing wave of Islamist extremism, newspapers said on Thursday, a day after Taliban militants killed the country’s only Christian government minister.

http://www.monstersandcritics.com/news/middleeast/news/article_1623088.php/Report-Saudi-Facebook-activist-planning-protest-shot-dead
Riyadh/Cairo – Saudi activists alleged Wednesday that state security shot dead a leading online activist, who was calling for a ‘Day of Rage’ on March 11 in the oil-rich kingdom.

–While these forces would previously have caused a flight to the treasuries and the dollar, they now support gold.  And the PBoC is moving toward making the yuan more of a reserve currency with cross border transactions. 
Reuters provides a simple translation and summary of the announcement: “China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency’s international role. In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. (ZeroHedge)

–Pimco’s Bill Gross released a new investment outlook today with this line: Many critics, though, including yours truly, would wonder whether Quantitative Easing policies actually heal, as opposed to cover up, symptoms of an unhealthy economy. They might at the same time ask simplistically whether it is possible to cure a debt crisis with more debt.  Also,

A successful handoff from public to private credit creation has yet to be accomplished, and it is that handoff that ultimately will determine the outlook for real growth and the potential reversal in our astronomical deficits and escalating debt levels.
http://www.pimco.com/Pages/Two-Bits-Four-Bits-Six-Bits-a-Dollar.aspx
Posted on March 3, 2011 at 6:58 am by alexmanzara · Permalink
In: Eurodollar Options

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