Here’s your epic face ripper continuing right on cue. The news driving markets this morning is threefold:
- The GOP is now backing the payroll tax cut extension. See full story here.
- The ADP employment report came in well above expectations setting the tone for what could be an upside surprise in Friday’s NFP report. See full analysis here.
- And finally, the Fed announced coordinated intervention to reduce dollar swap rates. They also said they are ready to act if the banking crisis in Europe were to impact the USA:
“The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly.U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.”
That’s a lot of news. The payroll tax extension is obviously great news. We still aren’t quite sinking into the austerity trap and with 10% deficits the negative impact of the balance sheet recession is being greatly reduced. The ADP figure is not entirely reliable, but it is consistent with my general idea that the US economy is hanging in against some incredible global headwinds. And the swaps are negative in that they expose the USA to foreign denominated debts, but positive in that they show the central banks of the world are cognizant of the crisis and attempting to be proactive. This doesn’t hit at the crux of the European crisis, but it does show that Lehman 2.0 is at least attempting to be avoided. There’s much work left to be done in Europe before this crisis is resolved though…But still, this is a good start.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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