Yellen to take over from Bernanke but nothing on debt ceiling yet


  • Yellen to become first female Chair of the Fed
  • Market metrics of investor fear begin to creep higher
  • UK industrial production due ahead of Fed minutes.

Overnight we have seen some classic, good politics out of the Obama administration as it became clear that they would appoint Janet Yellen today to take over from Ben Bernanke as the Chair of the Federal Reserve and with it, the most powerful technocrat in the world. The reason why this is great politics is simple; it involves action.

By finally answering the question over who would take over from Ben Bernanke come January, the Democrats have made themselves look proactive in dealing with the economy, while Republicans simply look like they hate Obamacare and will ransom the country to stop it. Which they do and they are just to be clear. There has been limited market reaction to Yellen’s appointment; she was always the favourite even during the fortnight that saw Larry Summers’ name receive more press than it ever deserved.

Elsewhere in Washington the movement has been typically minimal. Obama increased pressure on Republicans by once again sounding that ‘work-arounds’ of the debt ceiling, such as invoking the 14th amendment or the minting of a $1trn coin would not occur. Jack Lew, Treasury Secretary, is due to speak in front the Senate finance committee on Thursday about what preparations have been made should the worst come to the worst.

Anticipating the timeline of an outbreak of market panic is never an exact science but warning signs that banks and corporates are starting to make arrangements to tide themselves over in the event of a market crisis have increased in the past 24hrs. The premium that Eurozone banks and corporates pay to borrow USD on a 3 month term hit a 3 week high yesterday whilst the cost of 2 week borrowing was at the highest since May. Likewise the premia of sterling borrowings on 3 month and 2 week borrowings were at 4 month and year-to-date highs respectively.

“Because I was inverted” is not just a quote from Top Gun but also how traders are making money in US debt at the moment. We saw yield curves on short term US debt get quite uppity with the yield on one-month treasuries hitting 0.36%, only a bp below the two-year bond. These movements show that market participants are more worried about short term pressures than those in the future. This is not normal but does happen in time of market turmoil. That one-month yield is the highest since Lehman.

Today’s Fed minutes have been slightly rendered moot by the past fortnight’s political shenanigans and the press conference held by Ben Bernanke after the Fed’s decision to hold policy in September. Arguments around a potential government shutdown within these notes will be seized upon, especially if numbers are given on potential growth reductions. We will also be looking to see how many FOMC members expressed concerns over the decision not to taper; Esther George was the only actual dissenter but we would expect a fair few others also raised issues with the increases in the Fed’s balance sheet.

The IMF published its latest growth expectations for the world’s economies yesterday with little market movement. Highlights included the large downgrades made to emerging market economies such as India, Russia, Mexico and China, while they significantly upgraded the UK’s growth prospects through 2013.

We, and the market, never put too much emphasis behind these numbers; the IMF is a cracking lagging indicator and we have to remember at these points what Galbraith said: “The only function of economic forecasting is to make astrology look respectable.”

UK data kicks off today with industrial and manufacturing production numbers due at 09.30. 0.4% growth is expected in both following the strong recent performance of companies in that industry and the decent PMIs of late for the manufacturing sector.

Yesterday’s data from the Eurozone was poor with German factory orders disappointing against expectations, further emphasising the ‘fragile recovery’ in the Eurozone. Orders fell 0.3% in August against a 1.1% expected increase. Euro remained relatively stable this morning despite the disappointment.

Have a great day.

Topics: Finance
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