• Bernanke comes out batting for QE




  • Coalition building in Italy going badly




  • UK Q4 GDP should remain at -0.3% in Q4




  • Tucker talks of ‘negative interest rates’



Federal Reserve Chairman Ben Bernanke reiterated his support for the Fed’s quantitative easing program yesterday, in testimony to the Senate Banking Committee. The Chairman didn’t quite row back the hawkishness of the recent FOMC minutes, but his insistence that the “benefits of easing outweigh the costs and risks” allowed some slight dollar weakness.


This didn’t last long, however, as the first improvement in US consumer confidence since October caused a large run higher for the greenback. US home sales were also strong and only added to the USD strength.


The situation in Italy remains typically chaotic. The old mantra goes that ‘Rome wasn’t built in a day’ – it may only take a few days to destroy the the recent good fortunes of the Italian bond market. Coalition building seems to be going badly with Berlusconi not wanting anything to do with Monti, Bersani not wanting anything to do with Berlusconi, and Grillo not wanting anything to do with anyone.


The prospects of another election would leave Italy with 3 months of policy limbo; not what the markets want to see and Italian yields will be the ones to suffer. A short-term bond auction yesterday saw yields rise and demand fall. An auction of benchmark 10yr debt today should see a similar performance; auction schedulers would have hoped that the country would have a PM by now I’m sure.


Markets are not yet pricing in a euro break-up from this election; EUR would be a lot lower than the 0.8% it has lost this week in trade-weighted terms.


Sterling has once again shrunk back after a good day on Monday. Most of the negativity came after Paul Tucker, Deputy Governor of the Bank of England, spoke of an MPC conversation that considered negative interest rates here in the UK. Nothing is more painful for a currency than negative interest rates. CHF spent most of January weakening after banks initiated negative deposit rates on CHF holdings; Tucker’s comments are yet another overt example of an attempt to weaken the currency.


Prime Minister’s Questions today should be a rowdy affair following the UK’s downgrade by Moody’s last week and the stakes will only be heightened by the publication of the latest revision to UK GDP for Q4 this morning at 09.30. We believe that we will see the figure remain at 0.3% alongside the broad majority of analysts.


News from Italy, alongside the 2nd day of Bernanke testimony are the likely influences of today’s markets.



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