By David Stockman

But these steps aren’t a done deal, and depend critically on the ECB’s forecasts for inflation through 2016 that are due when the ECB meets on June 5. The central bank currently expects inflation to average 1% this year, 1.3% next year and 1.5% in 2016. ECB staff economists expect that, by the end of 2016, inflation will be around 1.7%.

The Bundesbank expects forecasts for this year to be marked down.

 

If the ECB keeps its 2016 projections unchanged then Germany’s central bank would be reluctant to support new stimulus measures, the person said.

 

The number of steps on stimulus it would back depends on how far the 2016 inflation projections undershoot current estimates, the person said.


The answer is thus reasonably evident. The ECB staff needs to re-set the inflation path so that the year-end 2016 number does not exceed 1.255%. Presumably then even the historically inflation-phobic bubba would call for moooar money and inflation.

Needless to say, in a world pregnant with geo-political, financial and economic disorder—including the accelerating slide toward meltdown in China, old-age bankruptcy in Japan, and cold war resumption on the Ukrainian front—-the idea that the ECB staff can forecast CPI inflation 30 months down the road to the third decimal place is farcical; it’s the central bankers equivalent to counting the angels on the head of a pin.

But that doesn’t matter because today’s drop box messages are not actually about the distant and unknowable economic future. They are about the need for another surge of front-running by the fast money traders in order to sustain the utterly lunatic  condition under which Spain’s 10-year bond is trading at a lower yield than its equivalent US treasury note.

Obviously, the promise of a new round of easing by the ECB in June is just what the doctor ordered. And today’s drop box messages are just what is needed to “build confidence” among fast money traders so that their current heavily long positions in peripheral government debt will be maintained and  enlarged.

Just to make sure that signals are clear, Murdoch’s drop box carried a second message today under the by-line of “Richard Barley” . After a lot of sophistry as to why five year Spanish debt yielding under 2% (“inflation-adjusted”) is actually a bargain due the fact that headline inflation has computed lower than trend for a few months now, the post gets to the meat of the matter. Spanish, Italian and even Greek bonds are a “buy” because the German’s are caving and the Draghi’s money machine is fixing to crank into a higher gear:

The euro-zone bond rally is remarkable. Spanish 5-year yields have fallen from north of 7% in 2012 to below those of U.S. Treasurys; Irish 10-year yields, which came close to 14% in 2011, are below those of the U.K. The market hasn’t lost the plot on credit risk, though. The current levels reflect the problem of very low euro-zone inflation and the big-bazooka policy response investors think might be coming.

 

…. On an inflation-adjusted basis, (Spanish) yields are higher than in the U.S. and U.K. Spain’s dollar-denominated bonds due 2018 yield around 2.07%, according to Tradeweb, more than five-year Treasurys due 2019 despite having a shorter maturity.

 

That reflects the true force driving bond markets…. the European Central Bank seems set to loosen policy in June, with the Bundesbank onside….

 

Given that array of forces, it wouldn’t be surprising to see euro-zone yields—including Germany, Spain and Ireland—fall further still versus those of the U.S. and U.K.

Once upon a time markets processed real world information and there was a need for independent financial journalists with actual investigative and analytical skills. But Murdoch did not become a multi-billionaire for nothing. In today’s central bank dominated financial markets he has apparently learned that human drop boxes will do just fine.

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