Monday, December 10, 2012 - The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

The Fed After the Twist, Italy After Monti, China After 2030, Warming After Doha

by Sinclair Noe

DOW + 14 = 13169
SPX +0.48 = 1418
NAS + 8 = 2986
10YR YLD -.01 = 1.62%
OIL -.25 = 85.68
GOLD + 8.10 = 1713.60
SILV + .16 = 33.37

Economic reports due this week are not likely to be market movers. Tomorrow we'll see data on wholesale trade, plus the trade deficit; a report on how many new job opening exist. Later in the week, we'll find out about retail sales. The big event this week is the Federal Reserve FOMC meeting Tuesday and Wednesday. The Fed will be looking at the unemployment numbers from Friday. The unemployment rate fell to 7.7% from 7.9%, but that was because more people dropped out of the labor force. Usually that’s not a good sign because it means jobs are harder to find. Ultimately the Fed wants to see the jobless rate fall to 6% or less, the same levels that prevailed before the 2008 meltdown.

Nobody seems to think there will be a big uptick in new jobs. Lackluster hiring means consumer spending is unlikely to rocket higher. Too many people remain out of work and the growth in the average worker’s paycheck isn’t even keeping up with the low increase in annual inflation. Business are waiting for the consumer to spend, consumers are waiting for businesses to hire. Something needs to happen to kick start the economy, a jolt of stimulus, but don't hold out for any major announcements from this week's FOMC meeting. Bernanke should be able to point to the fact that a much-needed recovery in the housing sector has taken hold. And that's partly due to the Fed's effort to reduce mortgage rates and keep them low. Hiring has continued at a modest pace; in other words, nothing that would cause the Fed to do anything dramatic.

The Fed will need to make a decision on Operation Twist. The policy, set to end this month, let the Fed sell short-term Treasuries it already owns in order to buy longer-term bonds. The basic goal of Twist has been to lower long-term interest rates without having to increase the dollar amount of the assets on its books. Here's the problem though. The central bank is quickly running out of short-term bonds available for it to swap in a one-for-one exchange. So, the Fed might just look at some kind of an outright bond purchase program.

The Fed could double down on its purchase of mortgage-backed securities, which currently totals $40 billion a month. That program puts downward pressure on mortgage rates. The Fed announced this third round of quantitative easing, or QE3, in September.

Or, the Fed might say it will buy more Treasury bonds as a way to keep longer-term interest rates low, maybe $45 billion a month in bond purchases. Treasury purchases without offsetting sales would expand the Fed's bond portfolio, pumping more cash into the economy but also making it more difficult to eventually sell the bonds to head off inflation.

Or, the other option is the Fed waits until the new year and to see how Congress handles the fiscal cliff, and then they'll know whether they need to do something dramatic or not.

President Obama and House Speaker Boehner held closed door meetings at the White House yesterday. No announcements were made; your guess is as good as mine. President Obama traveled to Michigan today to push for his proposed extension of tax cuts for middle class earners. The president's message in Michigan will be that the economy is rebounding and Congress should not risk that progress to save tax cuts for the rich. Meanwhile, there is a political battle in the state about union recognition.

President Obama threw his support behind labor unions opposed to a Republican-led drive for "right-to-work" laws in Michigan, saying efforts to pass such measures were not about economics but about politics. Obama used a visit to an auto plant to weigh in on the controversial push in the state legislature to impose new restrictions on unions.

Obama told a crowd of workers at the Daimler Detroit Diesel plant in Redford, Michigan: "What we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions. These so-called right-to-work laws, they don't have to do with economics, they have everything to do with politics. What they're really talking about is giving you the right to work for less money."

Union members and others opposed to Michigan becoming a right-to-work state plan major protests in the state capital, Lansing, this week. Organizers expect thousands at a rally tomorrow when the state legislature reconvenes. With Republicans in control of the legislature and the Republican governor committed to sign the laws, Michigan could become the 24th right-to-work state by the middle of the week.

The rest of the world watches to see if the fiscal cliff can be resolved, and with the International Monetary Fund's managing director Christine Lagarde warning of "zero growth" in the US as a worst case scenario: The International Monetary Fund has already lowered its growth estimate for next year for the United States to 2.1%, and Lagarde reiterated that the implications of going over the cliff would be precipitous. She said, "If the US economy was to suffer the downside risk of not reaching a comprehensive deal, then growth would be zero."

Italian equities and bonds sank after Prime Minister Mario Monti's decision to resign stoked concern about who will lead the euro zone's third biggest economy out of its debt crisis. The euro initially weakened on the news out of Italy, but it managed to rebound against the dollar and pared most losses versus the yen; the reaction to Monti's resignation may have been overdone. Monti announced over the weekend he would resign once the government's 2013 budget is approved, potentially bringing forward an election due early next year. Monti became an investor favorite over the past year as he spearheaded a reform agenda to rescue Italy from the threat of a Greek-style collapse.

Commodities markets rose on data that showed factory output in China, the world's No. 2 economy accelerated to an eight-month high in November. Copper prices hit their highest level in almost two months.

A new intelligence report says that by 2030 Asia will overtake North America and Europe combined in global power based on gross domestic product, population, military spending and technological investment.

China alone will probably have the largest economy, surpassing that of the United States a few years before 2030. Meanwhile, the economies of Europe, Japan, and Russia are likely to continue their slow relative declines.

The report, "Global Trends 2030: Alternative Worlds,"  www.dni.gov/nic/globaltrends. was issued by the National Intelligence Council, an analytical arm of the U.S. government's Office of the Director of National Intelligence. The report says that despite the economic power of China, the United States is expected to retain its superpower status because it still is the only country able to pull together coalitions and mobilize efforts to deal with global challenges.

The report claims China isn't going to replace the US on a global level,and while being the largest economic power is important, it isn't necessarily the largest economic power that always is going to be the superpower.

China recognizes that it cannot play that role of organizing across regions and across state-nonstate boundaries. The health of the global economy increasingly will be linked to progress in the developing world rather than the traditional West.

HSBC is apparently ready to settle money laundering charges for $1.9 billion. The settlement with HSBC stems from accusations that the British banking giant transferred billions of dollars on behalf of sanctioned nations like Iran and enabled Mexican drug cartels to launder money through the American financial system. The deal will force the bank to forfeit more than $1.2 billion in ill-gotten gains and pay additional penalties.

Since January 2009, the Justice Department, Treasury and the Manhattan prosecutors have charged six foreign banks, including Credit Suisse and Barclays. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for Cuba and Iran.

Earlier today, federal and state authorities announced a $327 million settlement with Standard Chartered. The British bank, which in August agreed to a larger settlement with New York's top banking regulator, admitted to processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries. To avoid having Iranian transactions detected by Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information

The Doha Climate Change Conference wrapped up this week. As Doha kicked off, we had just seen the effects of Hurricane Sandy, meanwhile environmental groups were prepared with a lineup of grim studies on just how far the world has fallen short on its environmental efforts. Carbon dioxide emissions hit a record high last year. Yet nations around the world, despite a formal treaty pledging to limit warming, and 20 years of negotiations aimed at putting it into effect, have shown little appetite for the kinds of controls required to accomplish those stated aims. There were no new emissions targets up for discussion at Doha. Commitments of monetary aid have been drying up.