Bundestag Approves, but Agenda Shifting

As widely anticipated the German Bundestag approved the EFSF reform plans.  The euro recovered fully from the sell-off in the US session yesterday that had brought it to almost $1.35 early in the Asian session.  However, that was largely before the vote and subsequently the euro half a cent.  Initial support is seen near $1.36, but the near-term range appears to be $1.35-$1.37.  Next week promises to see broader range, as ECB meeting and US jobs data provide fodder along with the purchasing manager reports. 

Even though the Bundesrat votes tomorrow on the bill and a few other countries have yet to vote, the agenda is already shifting.  The discussion now is not so much on the EFSF reforms that were agreed upon on July 21, but how to increase its efficiency.  A new structure maybe in place, EFSF2.0, but the funding is too small to be the proverbial bazooka that is needed for confidence as much as capability. 

The agenda is also shifting back to Greece.  While the Greek government has taken additional measures, the Troika that returns is like to demand more.  On top of that, and arguably even more important, jsut as it appears the private participation plan in Greece got to the 90% threshold, reports suggest that as many as 7 euro zone countries are talking about a greater hair cut  (participation) than the 21% contained in Greek2.0 plans.   When contemplating the ECB's exposure, note that it is the single largest holder of Greek bonds and it has recused itself from participation in the haircut. 

Spain and Italy risk returning to the market's cross hairs in a bigger way.  Italy's bond auction raised 7.9 bln euros of 5.5-9.0 bln intended.  Demand was solid but the price was higher yields.  Recall yesterday that Germany 5-year bond sale was not covered.  The higher yields in Italy are acceptable for a short-period of time but the 10-year yield is creeping back toward 6%. 

Spain's woes are less obvious at the moment and its 10-year yield is just above 5%.  However, news yesterday that the government pulled the auction of its lottery is a bad sign.  It raises questions about privatizations in general on the periphery and suggests Spanish bond supply will have to be greater. 

Separately Spain reported higher than expected inflation at 3.0% in Sept after 2.7% in Aug.  This follows on the heels of the higher than expected German inflation figures and the tick up in M3 and private credit expansion.  This reinforces the argument advanced here that talk of a 50 bp rate cut at next week's ECB meeting is a bit over the top.  Spain also reported soft retail sales (-4.4% year-over-year in Aug from -3.9% in July). 

Lastly, another UK BOE member, former hawk Dale is sounding more dovish.  The BOE meets next week and expectations are running high for a new round of asset purchases.  Sterling is struggling to build on recovery off the year low recorded on Sept 22 near $1.5330.  Convincing gains above  $1.57 is needed to signal the next leg of the recovery.