July 30. Seven Faces of The Peril

–Rates edged slightly higher yesterday on low volume.  This morning Aussie testing new lows as RBA’s Stevens doesn’t see impediments to further easing.  Japan stocks bounced and Shanghai stabilized, but looking at the Shanghai Composite chart visually defines a failed market.
–Going into tomorrow’s FOMC the market looks for clues to tapering.  Core PCE price index is near historic lows around 1%, though the Fed has said that factors holding inflation down appear to be transitory.  It’s worth looking back at Bullard’s paper from exactly 3 years ago, July 29, 2010, “Seven Faces of ‘The Peril’ “.  His conclusions (1) The FOMC’s extended period language may be increasing the probability of a Japanese-style outcome for the US and (2) on balance, the US quantitative easing program offers the best tool to avoid such an outcome.  http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf
–The “Peril” is falling into a Japan style deflationary trap, an “unintended steady state” of low inflation coupled with official policy rates near the zero bound.  One might argue that the US is nowhere near this state as equity prices are near all time highs and housing prices recover. So maybe that’s why policy makers are rejecting Bullard’s conclusions and again emphasizing forward guidance while turning back from QE.  However, the official statistics reflect the peril: Near zero policy rates, very low and falling inflation, sub 1% growth.
–Interesting article on China, the curse of the tallest building… http://www.bloomberg.com/news/2013-07-29/china-is-set-to-suffer-the-skyscraper-curse.html   On July 20, the Broad Group broke ground on Sky City on the outskirts of the south-central city of Changsha. The skyscraper will rise 838 meters (2,749 feet) into the heavens to become the world’s tallest building. If that weren’t feat enough, the project aims to wrap up construction in 90 days and at almost half the cost of Dubai’s Burj Khalifa, which it would top.


Posted on July 30, 2013 at 5:33 am by alexmanzara · Permalink
In: Eurodollar Options

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