Raymond James Weekly Bond Market Update: Time for Talk

Raymond James Bond Market CommentaryTime For Talk
By Benjamin Streed
August 27, 2012

Overseas, there appears to be a reemergence over talks as to whether Greece will continue to be a part of the 17-nation European currency zone amidst constant political jockeying. German Chancellor Angela Merkel was asked by a popular television station in Germany whether or not Greece would soon exit the European Union (E.U.) to which she responded that any doubters would need to seriously “weigh their words very carefully” if they think Greece will exit. The growing political popularity for a Greek exit has pushed some policymakers in Germany to seemingly encourage Greek officials towards a path of independence from the E.U. despite the obvious difficulties in doing so. Chancellor Merkel believes the Greek situation, and the Eurozone financial crisis as a whole, are entering what she believes to be a “decisive phase” in its evolution. She recently reiterated Germany’s support to continue to stand by Greek officials during this difficult time and that the E.U. should give Greek Prime Minister Antonis Samaras ample time to get his fiscal house organized. Meanwhile, Greece must continue to deal with speculation that the country will reject austerity measures and remove itself from the E.U. Prime Minister Samaras reiterated his frustration with the “cacophony” of speculation put forward by the markets as such “Toxic statements, from wherever they come, can only do damage”, he noted in a press conference with Merkel on August 24th.

The markets have generally been quiet when it comes to the troubles facing Greece, Italy and Spain in recent weeks as many await both a Greek report detailing the country’s progress as well as a German high court decision on September 12th that will rule on the legality of the European Stability Mechanism (ESM) to provide a permanent set of bailout funds. Several policymakers, including French Finance Minister Pierre Moscovici and his German counterpart Wolfgang Schaeuble will meet in Berlin this week to discuss ongoing measures to stem the financial crisis. European Central Bank (ECB) President Mario Draghi will speak from Jackson Hole, Wyoming on September 1st, and should he choose to utilize his public appearance like he did last time, could provide ample information as to the ECB’s intentions moving forward.

Political battles over monetary policy aren’t reserved for the Europeans; here in the U.S., a few of the Federal Reserve Bank Presidents made some timely and contrasting remarks ahead of last week’s Federal Open Market Committee (FOMC) release, which also coincidentally overlap with the buildup in election season. Prior to his scheduled appearance in China, “dovish” Federal Reserve Bank of Chicago President Charles Evans, a non-voting member of the FOMC, said that the weakening in global trade is “awful”. After the FOMC’s past meeting Evans was quoted as saying that any, “Failure to act aggressively now will lower the capacity of the economy for many years to come”.

On the flipside, Bank of Atlanta President Dennis Lockhart, a voting member of the FOMC, stated that U.S. policymakers face a risk of easing too much while attempting to correct a “disappointing” economic situation. He stated, “There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources”. He concluded that although monetary policy can exert a powerful positive influence on an economy it isn’t enough to solely rely on it, as it “is not a panacea”. Lockhart’s comments are a stark contrast to his typical “dovish” tone and those comments he made back in July when he stated that the weakening economic scene would increase the likelihood that he would support further Fed bond purchases. The FOMC will meet next on September 12th-13th but it is expected that Chairman Bernanke will use his speech in Jackson Hole on August 31st to outline his case for further accommodative monetary policy actions. The Fed is committed to provide “additional accommodation as needed” but will continue to take a wait-and-see approach to data including jobless claims, the unemployment rate and price inflation before implementing any new programs.

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