Macro notes: FOMC, Italian, Election and Rajoy.... (Bloomberg interview tomorrow)

FOMC Minutes – Non-event, but meeting minutes could give some information on FOMC bias on the length of the QE period – and further discussion on the “threshold targets”….

The December minutes was “confusing” – with several members expressing a desire to explore the benefits and costs of continued QE.

The main “monetary directional” power remains with Bernanke, Yellen and Dudley, the über-doves, so market consensus is for a FOMC open for discussion.

Any outside the box comment registered in the minute could have impact on Treasuries and tone of the US dollar, but the “surprise” element we saw in December on the internal discussion is gone, so I expect little market reaction.

Italian Election – Is not only important for Italy but also Europe overall – This weekend most policy makers will be keeping a close eye on the exit polls, “hoping for the best – fearing the worst”.

Recent polls have Berlusconi inside 5 pp – and its remarkable that the “successful” Monti can only get 13% votes leaving him last in the race. Berlusconi, like Le Penn in France, tends to poll lower in pre-election surveys than in the actual referendum, which could work to his benefit. There is no doubt Berlusconi has played his cards strongly – AC Milan, media and overall playing on his status “as a non-politician” (His own, not my interpretation)….

The consensus is for a Centre Left government but winning the Senate could prove difficult and a political gridlock could be the result which most likely have Italy back to the polls inside another six month in classic Italian fashion.

More practically for money markets – Italy have issued only 13% of this year expected bond sales (24 bln. vs. 187 bln. target) so whatever result we see on Sunday the main move could be in BTP’s when we open on Monday. The BTP, medium- long end should hurt the most as the threat of OMT will support anything up to 3 years, but the market will need to figure out that if Berlusconi wins and refuse to “comply with Brussels” – (The same people who got him out of office)……will the OMT still be made available?….

This election have so many moving pieces that guessing is waste of time.

The Italians should be looking for “anything but…” establishment, but that is not how it works in Italy, so market looks too complacent on the potential for Monday’s consequences.

Rajoy – who have no joy – one thing is to defend your policy as Head of State with the highest unemployment, weakest productivity and an economy which is severely dislocated, but doing with your personal credibility under attack due to corruption allegations is impossible.

Speech link: 

The Prime Minister offered a better tomorrow, even wanted to be applauded for getting the fiscal deficit below 7% of GDP – His only problem here being we are a few who can remember that Spain should have been at 3% to GDP the last five years running. It’s a little bit like losing 5-0 but drawing the 2^nd half 0-0…… and we should forget about the approximately 100 bln. EUR of bank refinancing, which is left outside the government numbers. Nice accounting.

He also seems to have ignored the small detail of Spanish debt which grew by 146 bln. EUR in 2012 – exceeding 882 bln. – Debt to GDP is the highest since 1910.

The fact remains that Spain have more unemployed than anywhere else, export volume did pick up, but when Europe slowed down in Q4 the price was paid immediately. The so called Labor Reforms dealt with the unemployed on short-term contract (which had no rules anyway) and left the Franco originated labor laws in place.

“To those who asking about relaxation, not a minute of relaxation or calmness. This has just started. The road to creating jobs is a long one” – Rahoy speech. If the last three years in the only the beginning I do not want to around for the next three. Spain is in a Catch-22 or more precisely, they are where Greece was two years ago. The comply with EU and ECB but only on austerity and often only in rhetoric.

The perfect solution to Spain’s and Europe’s problem is: austerity AND inflation AND growth. Spain have some of the first, none of the last two therein lies Spain ultimate challenge.