Gold hits tilt again with Stein speech.... July gold at 1192 !
http://www.zerohedge.com/news/2013-06-28/feds-jeremy-stein-full-speech
Fed's Jeremy Stein Full Speech In Which A "Hypothetical" September Taper Is Announced
The first of three Fed speeches is out, and as expected, it contains nothing new save for the ongoing barage of stock market battering for daring to sell on last week's Bernanke warnings that the Fed's monthly flow is set to begin tapering in September. It continues to be as if the Fed is shocked to learn that nothing else matters in this "economy" and, of course, "market" than what the Fed will do and say.
Here is the highlight paragraph:
... it often doesn't make sense to try to explain a large movement in asset prices by looking for a correspondingly large change in expectations about economic fundamentals. So while we have seen very significant increases in long-term Treasury yields since the FOMC meeting, I think it is a mistake to infer from these movements that there must have been an equivalently big change in monetary policy fundamentals.Nothing we have said suggests a change in our reaction function for the path of the short-term policy rate, and my sense is that our sharpened guidance on the duration of the asset purchase program also leaves us close to where market expectations--as expressed, for example, in various surveys that we monitor--were beforehand.
And here is why futures are now sliding - nothing quite like a hypothetical assumption in a Fed governor speech:
Both in an effort to make reliable judgments about the state of the economy, as well as to reduce the possibility of an undesirable feedback loop, the best approach is for the Committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting--as salient as these releases may appear to be to market participants. I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking.
Expect similar speeched from the other two Fed members due out later today.
Full speech:
Comments on Monetary Policy
Thank you very much. It's a pleasure for me to be here at the Council on Foreign Relations, and I look forward to our conversation. To get things going, I thought I would start with some brief remarks on the current state of play in monetary policy. As you know, at the Federal Open Market Committee (FOMC) meeting last week, we opted to keep our asset purchase program running at the rate of $85 billion per month. But there has been much discussion about recent changes in our communication, both in the formal FOMC statement, as well as in Chairman Bernanke's post-meeting press conference. I'd like to offer my take on these changes, as well as my thoughts on where we might go from here. But before doing so, let me note that I am speaking for myself, and that my views are not necessarily shared by my colleagues on the FOMC.
It's useful to start by discussing the initial design and conception of this round of asset purchases. Two features of the program are noteworthy. The first is its flow-based, state-contingent nature--the notion that we intend to continue with purchases until the outlook for the labor market has improved substantially in a context of price stability. The second is the fact that--in contrast to our forward guidance for the federal funds rate--we chose at the outset of the program not to articulate what "substantial improvement" means with a specific numerical threshold. So while the program is meant to be data-dependent, we did not spell out the nature of this data-dependence in a formulaic way.
To be clear, I think that this choice made a lot of sense, particularly at the outset of the program. Back in September it would have been hard to predict how long it might take to reach any fixed labor market milestone, and hence how large a balance sheet we would have accumulated along the way to that milestone. Given the uncertainty regarding the costs of an expanding balance sheet, it seemed prudent to preserve some flexibility. Of course, the flip side of this flexibility is that it entailed providing less- concrete information to market participants about our reaction function for asset purchases.
Where do we stand now, nine months into the program? With respect to the economic fundamentals, both the current state of the labor market, as well as the outlook, have improved since September 2012. Back then, the unemployment rate was 8.1percent and nonfarm payrolls were reported to have increased at a monthly rate of 97,000 over the prior six months; today, those figures are 7.6 percent and 194,000, respectively. Back then, FOMC participants were forecasting unemployment rates around 7-3/4 percent and 7 percent for year-end 2013 and 2014, respectively, in our Summary of Economic Projections; as of the June 2013 round, these forecasts have been revised down roughly 1/2 percentage point each. While it is difficult to determine precisely, I believe that our asset purchases since September have supported this improvement. For example, some of the brightest spots in recent months have been sectors that traditionally respond to monetary accommodation, such as housing and autos. Although asset purchases also bring with them various costs and risks--and I have been particularly concerned about risks relating to financial stability--thus far I would judge that they have passed the cost-benefit test.
However, this very progress has brought communications challenges to the fore, since the further down the road we get, the more information the market demands about the conditions that would lead us to reduce and eventually end our purchases. This imperative for clarity provides the backdrop against which our current messaging should be interpreted. In particular, I view Chairman Bernanke's remarks at his press conference--in which he suggested that if the economy progresses generally as we anticipate then the asset purchase program might be expected to wrap up when unemployment falls to the 7 percent range--as an effort to put more specificity around the heretofore less well-defined notion of "substantial progress."
It is important to stress that this added clarity is not a statement of unconditional optimism, nor does it represent a departure from the basic data-dependent philosophy of the asset purchase program. Rather, it involves a subtler change in how data-dependence is implemented--a greater willingness to spell out what the Committee is looking for, as opposed to a "we'll know it when we see it" approach. As time passes and we make progress toward our objectives, the balance of the tradeoff between flexibility and specificity in articulating these objectives shifts. It would have been difficult for the Committee to put forward a 7 percent unemployment goal when the current program started and unemployment was 8.1 percent; this would have involved a lot of uncertainty about the magnitude of asset purchases required to reach this goal. However, as we get closer to our goals, the balance sheet uncertainty becomes more manageable--at the same time that the market's demand for specificity goes up.
In addition to guidance about the ultimate completion of the program, market participants are also eager to know about the conditions that will govern interim adjustments to the pace of purchases. Here too, it makes sense for decisions to be data-dependent. However, a key point is that as we approach an FOMC meeting where an adjustment decision looms, it is appropriate to give relatively heavy weight to the accumulated stock of progress toward our labor market objective and to not be excessively sensitive to the sort of near-term momentum captured by, for example, the last payroll number that comes in just before the meeting.
In part, this principle just reflects sound statistical inference--one doesn't want to put too much weight on one or two noisy observations. But there is more to it than that. Not only do FOMC actions shape market expectations, but the converse is true as well: Market expectations influence FOMC actions. It is difficult for the Committee to take an action at any meeting that is wholly unanticipated because we don't want to create undue market volatility. However, when there is a two-way feedback between financial conditions and FOMC actions, an initial perception that noisy recent data play a central role in the policy process can become somewhat self-fulfilling and can itself be the cause of extraneous volatility in asset prices.
Thus both in an effort to make reliable judgments about the state of the economy, as well as to reduce the possibility of an undesirable feedback loop, the best approach is for the Committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting--as salient as these releases may appear to be to market participants. I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking. Even if a data release from early September does not exert a strong influence on the decision to make an adjustment at the September meeting, that release will remain relevant for future decisions. If the news is bad, and it is confirmed by further bad news in October and November, this would suggest that the 7 percent unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly.
In sum, I believe that effective communication for us at this stage involves the following key principles: (1) reaffirming the data-dependence of the asset purchase program, (2) giving more clarity on the type of data that will determine the endpoint of the program, as the Chairman did in his discussion of the unemployment goal, and (3) basing interim adjustments to the pace of purchases at any meeting primarily on the accumulated progress toward our goals and not overemphasizing the most recent momentum in the data.
I have been focusing thus far on our efforts to enhance communications about asset purchases. With respect to our guidance on the path of the federal funds rate, we have had explicit links to economic outcomes since last December, and we reaffirmed this guidance at our most recent meeting. Specifically, we continue to have a 6.5 percent unemployment threshold for beginning to consider a first increase in the federal funds rate. As we have emphasized, the threshold nature of this forward guidance embodies further flexibility to react to incoming data. If, for example, inflation readings continue to be on the soft side, we will have greater scope for keeping the funds rate at its effective lower bound even beyond the point when unemployment drops below 6.5percent.
Of course, there are limits to how much even good communication can do to limit market volatility, especially at times like these. At best, we can help market participants to understand how we will make decisions about the policy fundamentals that the FOMC controls--the path of future short-term policy rates and the total stock of long-term securities that we ultimately plan to accumulate via our asset purchases. Yet as research has repeatedly demonstrated, these sorts of fundamentals only explain a small part of the variation in the prices of assets such as equities, long-term Treasury securities, and corporate bonds. The bulk of the variation comes from what finance academics call "changes in discount rates," which is a fancy way of saying the non-fundamental stuff that we don't understand very well--and which can include changes in either investor sentiment or risk aversion, price movements due to forced selling by either levered investors or convexity hedgers, and a variety of other effects that fall under the broad heading of internal market dynamics.
This observation reminds us that it often doesn't make sense to try to explain a large movement in asset prices by looking for a correspondingly large change in expectations about economic fundamentals. So while we have seen very significant increases in long-term Treasury yields since the FOMC meeting, I think it is a mistake to infer from these movements that there must have been an equivalently big change in monetary policy fundamentals. Nothing we have said suggests a change in our reaction function for the path of the short-term policy rate, and my sense is that our sharpened guidance on the duration of the asset purchase program also leaves us close to where market expectations--as expressed, for example, in various surveys that we monitor--were beforehand.
I don't in any way mean to say that the large market movements that we have seen in the past couple of weeks are inconsequential or can be dismissed as mere noise. To the contrary, they potentially have much to teach us about the dynamics of financial markets and how these dynamics are influenced by changes in our communications strategy. My only point is that consumers and businesses who look to asset prices for clues about the future stance of monetary policy should take care not to over-interpret these movements. We have attempted in recent weeks to provide more clarity about the nature of our policy reaction function, but I view the fundamentals of our underlying policy stance as broadly unchanged.
Thank you. I look forward to your questions
More Fed Jawboning On Deck To Usher Green Close To First Half Of 2013
Submitted by Tyler Durden on 06/28/2013 - 07:16
Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.
PBOC Head To "Address Liquidity At Proper Time" Even As China's Bad Loan Giant Awakes
Submitted by Tyler Durden on 06/28/2013 - 03:36
In the aftermath of the record cash crunch in the Chinese interbank market, many financial institutions in China and abroad have been hoping that the PBOC would either end its stance of aloof detachment or at least break its vow of silence and if not act then at a minimum promise good times ahead. Alas, despite repeated confusion in various press reports that it has done that, it hasn't aside from the occasional "behind the scenes" bank bailout. And at today's Lujiazui Financial Forum, PBOC governor Zhou Xiaochuan kept the status quo saying the central bank will adjust liquidity "at the proper time to ensure market stability." That time, however, is not now.
The reason is that the PBOC is actually doing what all other developed world banks have been mouthing off they would do but are terrified to - let the commercial banks forcibly deleverage without any central bank assistance, in order to end the capital misallocation. Or so the bank states. The bigger issue is that the lack of easing by the PBOC implicitly means massive deleveraging within the financial sector, likely compounded by asset impairments and deposit haircuts. But at least the intention is admirable.
Among the other soundbites from Zhou's speech:
- Financial markets are sensitive to signals
- China will use various tools to adjust liquidity
- China will maintain stable market conditions
- China’s economic growth is "stable" in general
- China’s growth slowdown remains in a “reasonable” zone
- China to speed up economic restructure and adjustment
- China’s economy remains a key engine for global growth
- Zhou says he is fully confident about the nation’s economic prospect and financial system
Caixin has more details of his speech:
"On one hand, the central bank will guide financial institutions for reasonable credit issuance and asset arrangement to support structural adjustment and upgrading of the real economy," Zhou said. "On the other hand, it will adopt various instruments and measures to adjust market liquidity to ensure overall stability."The People's Bank of China said in a June 17 notice that it would leave banks to overcome any difficulties themselves. But on June 23 the stock market slumped and the next day the central bank said it offered "support" to certain banks.Zhou also said the country's financial system was stable in general, and the bank will continue with prudent monetary policies and implement fine-tuning at the proper time."The Chinese economy is still a main driver of global economic growth," the central banker said. "We remain confident in China's economic development and the financial market."At the same conference, Ling Tao, deputy director of the central bank's Shanghai branch, said that the liquidity shortage would be temporary and risks to the banking system are under control.Ling also said the authorities have reached an agreement on a long-discussed deposit insurance system, which aims to protect depositors."We have long had measures to protect deposits, but they have remained inefficient and opaque," he said. "So we need to establish a clear deposit insurance system and push forward with the legislation."
Ironically, China is concerned about depositor protection just as Europe unveiled a pan-European mechanism in which depositors will be among those "haircut" to rescue failing banks. Then again, since China has over $14 trillion in deposits, or about 40% more than the US as China never developed a shadow funding system quite as advanced as that in the US, one can see why spreading the myth of impairment-remote deposits is so critical.
And putting it all together, and why China has opened a Pandora's box it has no control over any more, is Bloomberg explaining why recent liquidity events may have once again brought attention to the one thing that mere soothing words have no control over: bank solvency, and the massively underreported bad loans behind China's pristeen financial facade.
Borrowing costs for Chinese banks have surged the most in at least six years this month as rating companies say a cash crunch threatens to swell bad loans.The yield spread for one-year AAA bank bonds over similar-maturity sovereign notes jumped 56 basis points so far this month to 163 basis points, the most in ChinaBond records going back to 2007. The similar AA gap widened 59 basis points to 188. Even as China Construction Bank Corp. (939) President Zhang Jianguo said yesterday cash conditions have normalized, the benchmark seven-day repurchase rate was fixed at 6.85 percent, almost twice the 3.84 percent average for this year.“There could be unintended consequences from the central bank’s approach,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “We expect some deleveraging at banks’ interbank and wealth management businesses to unfold. Credit growth would slow. This could pressure banks’ asset quality.”
...
Bad loans at banks including Industrial & Commercial Bank of China Ltd. have increased for six straight quarters through March 31, the longest streak in at least nine years.Chinese commercial banks’ outstanding non-performing loans rose 20 percent to 526.5 billion yuan ($86 billion) at the end of the first quarter from a year earlier, accounting for 0.96 percent of total lending, according to data from the China Banking Regulatory Commission.Those figures don’t reflect the real amount of debt because of the ways banks move loans off their books, Charlene Chu, Fitch’s Beijing-based head of China financial institutions, said in April. Some loans are bundled and sold to savers as wealth-management products, which pay more than regulated deposits, she said. Other assets are sold to non-bank institutions, including trusts, to lower bad-debt levels.Non-performing loans may rise faster as weaker borrowers have difficulty refinancing credit in the coming months, Moody’s Investors Service warned on June 24. The official Xinhua News Agency said in a June 23 analysis that risk is increasing in the financial system as the shadow-banking sector expands and institutions make more highly leveraged investments.Shadow lending flourishes in China because an estimated 97 percent of the nation’s 42 million small businesses can’t get bank loans, according to Citic Securities Co., and savers are seeking higher returns. The industry may be valued at 36 trillion yuan, or 69 percent of gross domestic product, JPMorgan Chase & Co. estimated last month. The crackdown may damage the economy by shrinking funding for smaller companies, Barclays Plc said on May 20.
It is precisely this shadow banking industry that the PBOC is now targeting: an industry that if eliminated will take some 70% of China's GDP with it, unless of course, the PBOC finds a way to inject a matched amount of credit to undo what the punditry will realize with its 6-8 week usual delay, the most unprecedented forced deleveraging in Chinese history. The embedded risk? Spiralling, disorderly defaults.
“The problem is that when debt levels have got so high, and it’s more debt that keeps the existing debt afloat, you absolutely have to stop the process, but it’s very difficult to do so in an orderly way,” said Michael Pettis, a finance professor at Peking University “There’s always a risk that the unwinding of the debt becomes disorderly and the PBOC will be blamed for mismanaging the process.”About 563 new wealth products were issued last week, two-thirds more than the previous period, according to Benefit Wealth, a Chengdu-based consulting firm that tracks the data. China Minsheng Banking Corp., the nation’s first privately owned lender, is marketing a 35-day product that offers an annualized yield of 7 percent. China’s one-year benchmark deposit rate is 3 percent.Mid-sized banks get an average of 20 percent to 30 percent of their funds from such products, according to Fitch, which didn’t name specific lenders. That makes these banks more susceptible to default risks on the products.
Perhaps that - when bank after bank is closing operations due to the halt in Ponzi liquidity - is the time Zhou considers "proper" for further liquidity injections. Of course, as Lehman learned the hard way, the "proper" time always tends to be too late.
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