In Between Days

by CC November 15, 2011 1:09 am • Commentary


Wal-Mart and Home Depot report earnings ahead of the opening bell, as do Staples, TJX and Beazer Homes. Retail sales, released at 8:30 a.m. EST, are expected to be up 0.3 percent for October, but up just 0.2 percent when cars are excluded. Retail sales rose a better-than-expected 1.1 percent in September, its best pace in seven months.

“We think that the retail sales will be on the softer side this month,” said Dean Maki, chief U.S. economist at Barclays Capital. “We’re looking for a 0.1 headline and a flat reading outside of autos. The core we expect would be up 0.2 percent, which excludes autos and gasoline… It would still be consistent with 2.5 percent growth in consumer spending in the fourth quarter.”

PPI is also expected at 8:30 a.m., as is the Empire State survey, expected to show some improvement. PPI is forecast at a consensus -0.1 percent. Business inventories are reported at 10 a.m.

There are also a number of Fed officials speaking Tuesday, including Chicago Fed President Charles Evans, who will be on CNBC at 11 a.m. for an hour. Evans, a dove, was the lone dissenter at the last Fed meeting. He also speaks at the Council on Foreign Relations earlier in the morning.


German Chancellor Angela Merkel caught the mood of crisis with a stark warning Monday that Europe could be living through its “toughest hour since World War Two.” She told her CDU party she feared Europe would fail if the euro failed and vowed to do anything to stop this from happening.

Monti will pursue his efforts Tuesday to secure enough support from Italy’s feuding politicians to allow his cabinet of experts to speed up delivery of painful reforms of pensions, labor markets and business regulation needed to put Italy’s finances on a sustainable footing.

Italy has to refinance some 200 billion euros ($273 billion) of bonds by the end of April, a daunting prospect given it was forced Monday to pay a euro-lifetime record yield of 6.3 percent to sell five-year bonds to wary investors.

The auction, and the release of figures showing industrial production slumped by 2 percent in the euro zone in September, raised the spectre of recession and provided a gloomy backdrop to Monti’s consultations with the heads of smaller parties.

Felix Salmon

And the way the banking sector works, banks have to be constantly lending to each other: in nearly every country in Europe, the amount of bank debt coming due every day is higher than the total amount of bank capital in the system. The overnight interbank market is the bloodstream of the European financial system, and the flow of blood is coming to a halt. Or, as the Exane report puts it, “if we think of wholesale funding as commodity input, it is much more like the supply of limestone to a kiln than the supply of flour to a bakery – not only can the banking sector not produce loans without new financing, it cannot shut down for a short period of time either, it needs constant supply.”

Kevin Drum

The whole thing is a bit mysterious, though, as bank runs so often are. In the United States in 2008, the same thing happened both to specific banks that were in trouble (Bear Stearns, Lehman Brothers) and to the banking system in general. But the reason was fairly obvious: American banks held huge portfolios of subprime toxic waste, but no one knew exactly who held what or how much it might be worth. This made the entire banking sector suspect, and wholesale funding dried up systemwide.

Europe’s case is different. Their problem right now is sovereign debt, and that’s much more quantifiable. The value of some sovereign debt (Greece, Italy, etc.) is indeed in doubt, but at least we have a pretty good idea of which banks hold how much debt. So even if you assume a substantial markdown of sovereign debt, you can still have a pretty good idea of which banks are in trouble and which ones are basically fine. So why has wholesale funding plummeted throughout the entire banking system?

This is something I haven’t quite sussed out yet. But in one sense it doesn’t matter: panic is panic, and if banks are in the middle of a run — which is essentially what a wholesale funding cutoff is — then somebody has to step in and act as lender of last resort. Unfortunately, Europe no longer has anybody to take up this role:

This is a serious structural issue with the way that the European monetary system was constructed: the ECB is tasked only with guarding inflation, and not with ensuring the health of the banking system. Individual national central banks are meant to do that. But they can’t print money — only the ECB can. So when there’s a liquidity crisis, no one’s able to step in and solve it.

….But it’s liquidity crises which are the most violent, and which can kill a financial system — indeed, an entire economy — more or less overnight. Someone in Europe needs to come up with a plan for how to address the current crisis — now. Because if it gets any worse, it could well be too late.

Tick tick tick.


Monday was the drabbest day for trading since Memorial Day. Yawn indeed!

And then there’s the bond market. Here’s rates and currencies reporter Min Zeng on how the fixed income guys felt after their three-day weekend:

Just like the VIX is the stock market’s “fear gauge,” the two-year U.S. swap spread is a decent indicator of the fear gauge in credit markets, and it just jumped to its highest level since June 2010 today. The gauge measures the difference between two-year swap rate and two-year Treasury yield — basically a measure of how worried investors are about counterparty risk, especially among banks. The gap traded 2.75bps wider at 47.75bps, the highest since 48.5 bps on June 7, 2010. Four months ago, the gap was 20.5 bps. And it may rise further still with persistent worries about euro zone’s debt crisis and its implications for banks and the banking system.