The ECB cut their benchmark rate again by 0.25% down to 1.00% in an effort to ease strains on the ‘system.’  They also expanded the range of collateral for loans to banks, increased the maturity of those loans up to three years and lowered reserve requirements—easing on all fronts.  Policymakers have been hesitant to go full-tilt on quantitative easing measures in the style of U.S. actions in recent years, partially out of the ‘moral hazard’ concern that such measures would reduce the incentive for individual member nations to get their act together.  This is not surprising, but it’s the continuing story of the stronger countries not wanting to set a precedent of bailing out the weaker ones every time things get tough. Read more

This has been another interesting week from a news standpoint.  The ECB, Federal Reserve and other major central banks coordinated efforts to enhance the availability, extend the expiration date and lower the pricing of dollar loans through liquidity swaps—the prices of which were lowered from 1.00% to 0.50% over the applicable ‘OIS’ (or Overnight Indexed Swap rate, a type of prime rate for such instruments).  Secondly, these central bank policymakers offered temporary additional swap lines in any of their currencies/jurisdictions (other than the dollar only), should they be needed. Read more

Over the holiday-shortened week, there was no Thanksgiving in Europe (figuratively and literally) as concerns remained focused on the ongoing sovereign debt crisis.  From the domestic side, the news was fairly light.

Existing Home Sales were up +1.4%, which was a surprise improvement compared to the 3% drop experienced in September.  Analysts had expected a further drop again this month.  The stronger results were directly related to better single-family sales, while condos/co-ops were unchanged.  The seasonally-adjusted number of homes on the market, however, was unchanged and sales prices fell by about -1% (-4.7% year-over-year). Read more

Economic Notes

European concerns continued to dominate other issues.  This is unfortunate, considering that U.S. news has been looking better as of late and is perhaps underappreciated.  Japan, which has also been largely ignored, grew for the first time in four quarters.

The European Central Bank purchased €10 Billion to purchase Italian and Spanish Bonds in order to bring yields in both of those nations back below 7.0%—the often-referred-to “breaking point.”  In response to criticism he could be doing more, ECB President Mario Draghi maintained that ‘price stability’ should remain the institution’s primary objective and doing otherwise might threaten its credibility (note that many central banks, including the ECB, are subject to only a single mandate, as opposed to the Federal Reserve’s dual mandate of stable prices and maximum employment).  Of course, with such a broad mandate, a wide variety of actions could be justifiable. Read more

It was a relatively light week from an economic standpoint, as the highlights were mostly focused on Italian and Greek politics and their role in the ongoing Eurozone situation (see last week’s note regarding drama).  As the pinnacle, we saw a resignation of the heads of state in both nations as part of the negotiation process for austerity and debt reduction measures.  On Friday, Italy’s senate approved a series of these measures, which brought down yields.

The high-profile and closely-watched economics team at Goldman Sachs now believes the Eurozone has entered into recession in Q4, albeit perhaps a shallow one.  The core nations are expected to bounce back next year, while the peripheral countries face a continued rough road for several years, in their estimation, led by difficult by austerity measures.  Whether this is proven true or not, markets already appear to have priced in this outcome.  Read more

We live in challenging times, but when has anything ever been smooth sailing?  The financial markets are aware of outstanding issues in the world, and collectively price them in accordingly.  That’s why the surprises (both good and bad) have the tendency to result in overshoots of market reaction.  For example, despite Tuesday’s “crisis,” markets were already up again Wednesday.  In October, the S&P gained 11%, which helped reverse a good bulk of August and September’s losses.  Despite the high degree of volatility, however, we are not as far away from late July’s level as it might appear. Read more