Nov 19. Blame China

Bernanke testimony was released, the main thrust of it was that emerging market economies with trade surplusses (China) should let their currencies strengthen to foster better growth balance. In a way, he calls for a weaker dollar, which should again support things priced in dollars, including financial assets.  On global cooperation (and near start of speech):  “In recent months, however, that sense of common purpose has waned. Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems.”
–He also repeats that monetary policy can’t do it alone, and takes a swipe at those who would change the Fed’s dual mandate: “…US runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable. Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone.”  On the other hand he mentions strong Q4 ’09, Q1 ’10, as being partially due to fiscal stimulus that has faded, then pretty much circles back to “it’s China’s fault.”
–Also mentions increasing interest on reserves as a tightening measure if needed. 
–It’s a circular defense of the treasury purchase program, but one could also conclude that the Fed, now facing constraints on bond buying, has run out of bullets, so the Chairman has decided to outline risks and shift blame in case things implode.  Not exactly confidence inspiring.
–Muni problems continue to percolate as the “Build America Bond” program nears expiration.  This program had the US guaranteeing a portion of muni interest payments to investors.  State and local gov’t financial woes could easily push Ireland et al off center stage in coming months.
–Strong Philly Fed sent bonds to lows which edged higher into close.

Posted on November 19, 2010 at 6:53 am by alexmanzara · Permalink
In: Eurodollar Options

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