Fisher Investments Editorial Staff
Monetary Policy

Liquidity, Payrolls and Ratings, Oh My!

By, 12/01/2011

Wednesday was a busy news day and saw a strongly positive finish from markets. Below is a brief roundup of some of the day’s more prominent headlines.

Liquidity . . .

On Wednesday, six global central banks announced an agreement to extend a previously announced dollar swap program to lend US dollars to other central banks—and cut the associated interest rate by 50 basis points. At issue is dollar funding for eurozone banks, a small source of European bank funding, but one where conditions have recently tightened. Swaps essentially allow central banks to exchange their home currency for dollars at the Fed, at a set exchange rate and for a set duration of time. Those central banks are then free to lend US dollars to financial institutions in need of dollar liquidity.

Some critics were quick to note the program doesn’t fix all of Europe’s underlying issues, and they’re right. The measure’s aim wasn’t to solve Europe’s sovereign debt issues but to head off potential problems in European bank funding markets. In that way, the extension seems prudent policy and in keeping with central banks’ original mandate to act as lender of last resort. While it remains to be seen whether any or many eurozone banks need this aid, having it there proactively isn’t a bad thing.

. . . and More Liquidity!

More evidence against a Chinese hard landing emerged Wednesday, when the government announced it’s cutting bank reserve requirements effective December 5. This follows several recent signs of monetary loosening, including increased loan access for small to medium businesses, the end of bank-specific reserve requirements in September and unofficial reports of increased system-wide lending starting the last week of October. Premier Wen Jiabao has also said China will ensure “reasonable growth in money supply.”

And how can he do that? Annual loan quotas are the government’s primary means of controlling economic growth. Typically, they’re reset in December and, though the government doesn’t publicly release the actual quotas, smaller policy changes offer insight into whether they plan to loosen or tighten. In our view, evidence points to looser quotas in 2012, which likely supports economic reacceleration. As we’ve written, Chinese authorities have historically allowed the economy to slow into an election year, and then hit the gas in an effort to limit popular unrest during the handover of power. It appears they continued following that pattern Wednesday, likely rendering 2011’s slower growth temporary and part of a fairly predictable historic pattern.

Persistently Plodding Payrolls

Private payrolls as measured by ADP jumped 206,000 in November—over half again as much as expected and the fastest pace in seven months. Not only that, but the acceleration was across all business sizes—small businesses added 110,000 jobs; medium businesses 84,000 and large businesses 12,000. ADP also revised October’s numbers from a 104,000 gain to 130,000.

All told, a decent employment report—though focus will quickly shift to the BLS employment report due this Friday.

Combined with a handful of other positive numbers out Wednesday both stateside and globally—like German unemployment at a 20-year low, an unexpected increase in German retail sales, a bigger-than-expected increase in the Chicago area Manufacturing Index and others—continued overall improvement seemingly lowers the likelihood we’re on the verge of another recession. That’s not to say other parts of the world couldn’t see near-term slowing or even possibly recession or that we couldn’t still have a recession in the US down the road. It just doesn’t seem terribly imminent—whatever some in the media may continue to say.

Downgrade Everybody!

Late Tuesday, credit ratings agency S&P announced ratings changes to 37 global financial institutions—with most amounting to slight downgrades. Eeek! Do they see a systemic crisis developing?

Before hitting the panic button because not-so-omniscient S&P said their opinion of many banks is less today than it was yesterday, consider this has little to do with current conditions in the banking sector. Instead, it’s related to a large project announced a few weeks ago to align ratings with what S&P sees as an “evolving global banking landscape.” (In fact, the same announcement states S&P’s preferred measure of bank capital has improved rather nicely the past few years.) S&P suggests bank bailouts in 2008 and 2009 were unpopular in some circles. (News to approximately no one.) And they’re therefore less likely to be repeated in the future for many Western nations, which means to S&P, most Western banks should be downgraded.

S&P plans to review and possibly adjust hundreds of financial institutions’ ratings in line with its new methodology. Our recommendation: If you still placed a lot of forward-looking importance on ratings agencies’ opinions before this announcement, do yourself a favor. Stop now.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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