Indian Summer

Italy's credit rating was hit for a notch but T-Bills were placed for both themselves and Greece. The Fed starts a tricky 2 day meeting here at home. I still favor additional conventional LSAP to sterile QE duration extension. The process of extinguishing some supply is actually easy, exit would be much more complicated.

The CB swap lines are a reboot of a QE tool and can create reserves. The concept of disappointing the bond market may weigh in favor of acting on Op Twist, even though efficacy is sketchy. Other  regulatory moves continue to push back against the Fed objectives. The Fan/Fred oversight is neutralizing efforts to aid the mortgage and housing mess. The FDIC and Dodd/Frank are increasing bank cost structures as money remains hoarded and velocity implodes.

Still, we may be in for a touch of Indian Summer. EM central banks have moved away from tightening and DM CBs are poised to print. The 8 months of global shocks has calmed somewhat. Capital markets will remain fickle and volatile but the data should stabilize to improve a bit. The Fed finds itself in the position that the measure of its success will be the failure of its actions (i.e. long yields would need to rise and spreads come in).

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