A Vicious Circle

Yesterday afternoon, Brazil raised the Selic rate to 9% in an attempt to stem capital outflow and support the real. This was the 4th move by Copom since April. Early this morning, Indonesia raised the FASBI by 50bp to 5.25%. India moved in July and pressure is mounting on the incoming RBI chief Rajan to act quickly after Sept 5. Turkey, probably the most vulnerable to fx trouble of the lot, raised the rate  but the Lira continued to slide.

The sharp shift in US term structure has complicated and accelerated the emerging world situation. Somehow, this ring of fire has been dumbed down in US analysis to "tapering." Three top tier investment banks put out vapid and inane drivel concentrating on a Sep announcement of a slight reduction in the Fed's LSAP program this week. We doubt suddenly poorer and encumbered Indians and Indonesians are impressed.

Also last night, Janet Yellen essentially pulled her name from Reserve Chair contention. Summers inherits a big balance sheet to match his ego but perhaps that will prove to keep him in check. We do see this as the deepest Administration move into Foggy Bottom since Nixon. This is not the forward guidance you were looking for.

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