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Saturday, September 28

28th Sep - Weekender: Europe & US

German election aftermath, the apparent backpedaling on the federal Europe and the looming US government shutdown are the main drivers right now. Italy's government looks like it could fall.

ECB's meeting next week will probably not do anything new, but might give further hints on a new LTRO, due later - if still needed at that point.

The Federal Reserve’s tapering is still featured heavily in articles, but will remain on hold probably until at least next December. Should the shutdown happen, even next Friday's unemployment report would perhaps not be published - effectively stopping the Fed from making informed decisions, and certainly pushing the tapering-date forward.

Previously on MoreLiver’s:

Brussels blog round up 21 – 27 SeptemberEuropp / LSE
German election reaction, French cultural exceptionalism, and is the UK right to challenge the cap on bankers’ bonuses?

Single Supervisor for European Banks? Still No CigarWSJ
Britain – flushed by a string of victories over Brussels’ regulatory reach – asked to postpone final approval of the so-called Single Supervisory Mechanism…Negotiations on the second leg of banking union — a single resolution mechanism — don’t look any more straightforward.

Margins to save themselves, European editionalphaville / FT
European stocks are no longer cheap. Word reaches us from Morgan Stanley this morning that valuations are starting to look “somewhat full”… But there is hope: margins.

Almost one third of Austrians could vote for anti-euro partiesThe Telegraph
Austria is up with its national election on Sunday. Few people talk about the Austrian elections, but they may contain a stark warning to those seeking to press ahead with more eurozone integration – with or without the consent of voters.

France’s economy: Budgetary bluesThe Economist
Tax hikes have reached their limit.

Eurozone: ‘Debt targets for Greece questioned’Presseurop

How to make Europe's incipient recovery durable: End policy
The only uncertainty is why some cannot see factsAntonio Fatas
In Front of Their NosesKrugman / NYT

Germany’s election: Angela’s dilemmaThe Economist
Germany’s election: A new match for blackThe Economist
Charlemagne: Waiting for AngelaThe Economist
After a stunning victory, Merkel needs to pick a partner to form a government – and thus she depends on the opposition. Meanwhile, Europe is waiting for her big decisions.

Merkel's potential coalition partners drag their feeteuobserver

Until Angela Merkel forms a governing coalition, Greece will continue to be in limboEuropp / LSE

Merkel's Next MoveForeign Affairs
Will the Empress of Austerity Bring the Socialists on Board?

Power HungryForeign Affairs
Will Angela Merkel Complete Germany's Energy Revolution?

A new way for Germany and EuropeBruegel

Germany As Currency ManipulatorKrugman / NYT

German September inflation below and not even close to 2% - Merkelnomics

German election ended - return to EU issuesDanske Bank (pdf)

ECB Liquidity-Boost Urgency Seen Fading Even on Cash DropBB
The need for a new injection of cash into the euro area’s banking system may be fading as stress in the region eases. Of 19 economists surveyed by Bloomberg News, 11 said there’s no requirement for another long-term refinancing operation from the Frankfurt-based central bank, even after excess cash in the region’s financial system fell to the lowest level since December 2011.

ECB Preview: Still in the action zoneING (pdf)
Three factors are still disturbing the ECB’s comfort zone: the Fed, higher money market rates, and lacklustre credit growth. Words still seem to be the first line of defence to shield the Eurozone from higher interest rates and a stronger euro. However, the strategy of words without deeds could soon wear out. Consequently, we still expect further ECB action in the next 6 months, with liquidity operations being the preferred option.

Italian government near collapse after budget talks failReuters
Italian Prime Minister Enrico Letta failed to secure backing for a vital package of fiscal measures on Friday as divisions with center-right partners in his fragile coalition took the government to the brink of collapse.

Italian politics: Still a puppet masterThe Economist

Italian GDP Slumps Fastest Since 1861's UnificationZH

Italy: Report on the Observance of Standards and Codes – IMF
Italy: Financial System Stability Assessment – IMF
Italy: Selected Issues – IMF
Italy: 2013 Article IV Consultation – IMF

Looting the Pension FundsRolling Stone
Matt Taibbi: All across America, Wall Street is grabbing money meant for public workers

The meaning of LehmanThe Economist

A Synopsis of Fedspeak Tim Duy’s Fed Watch
There is broad support/willingness to start the tapering process as soon as the data allows.  In general, even the doves believe that it is the stock, not flow, that matters, and at this point a small taper will have little impact on the stock.  Earliest timing is December.  If the government shuts down, they might not even have an employment report for the October meeting.

Fed doves make case for patience on tightening policyReuters
The Federal Reserve must be patient in deciding when to scale back bond purchases, top officials said on Friday, with one arguing it could wait "years" to lift interest rates and another suggesting it could tolerate inflation rising to 3 percent.

Fed May Not Start Taper Until JanuaryWSJ

Fed’s Narayana Kocherlakota: A time of testingThe Big Picture
The good news is that, with low inflation, the FOMC has considerable monetary policy capacity at its disposal with which to address this problem. The FOMC’s test today is to figure out how best to deploy this capacity. The answer lies in taking two steps. The first step is to communicate that our goal is to accomplish a fast return to maximal employment while keeping inflation close to, although possibly temporarily above, the target of 2 percent. The second step is to do whatever it takes, on an ongoing basis, to achieve that goal. A goal-oriented approach to monetary policy greatly reduced inflation in the early 1980s. Adopting such an approach in our own time would improve labor market outcomes.

A New Strategy for the FedEvan Soltas
What has interested me is the Fed's apparent difficulty communicating the way it anticipates to tighten monetary policy over the next five years conditional on economic performance and outlook. To be fair, this isn't at all an easy task. A lot goes into it.

New York Fed Conducts Test of Fixed-Rate Reverse Repo FacilityBB

Learning to Love the Fed TaperWSJ

What if I were on the FOMC?The Money Illusion

Don’t Cry for Me, Ben BernankeProject Syndicate
Simon Johnson: The Federal Reserve will decide on monetary policy for the US based primarily on US conditions. Economic policymakers elsewhere who are pleading for a postponement of US monetary tightening should understand this hard reality and prepare accordingly.

The Taper and Its ShadowProject Syndicate
Fed policymakers and other North Atlantic central bankers who believe that further extension of QE poses substantial risks need to explain exactly what those risks are and why we need to guard against them now. If not – if the risks compelling the end of QE are left vague – they will be unable to counter investors’ belief that a taper today will mean a new path for interest rates tomorrow.

Reaching for the pitchforks, bubble editionalphaville / FT
News that
US housing is turning frothy again, with San Francisco prices up 25 per cent over the last year, has Albert Edwards of Societe Generale reaching for the exclamation marks.

When Bubbles Fail: Albert Edwards Explains What Happens When The Fed Can No Longer Contain The Fury Of The "99%"ZH

Jobs Report Could Be Released Even in ShutdownWSJ
U.S. jobs report, other economic data would be delayed by shutdownReuters

Government Shutdown Odds: 40%, Nomura EstimatesZH

Credit Markets Signal Bigger Fear Of Treasury Default Than In 2011ZH

Goldman Sachs: Why You Should Be Rooting For A Government ShutdownBI
Shutdown would make raising the debt ceiling easier.

Shutdown Would Shave U.S. Growth as Much as 1.4% in Q4BB
A shutdown of the U.S. government would reduce fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, economists say, as government workers from park rangers to telephone receptionists are furloughed.

Government shutdown looms as lawmakers feudReuters
President Barack Obama sternly warned the Congress on Friday against a government shutdown on October 1 as lawmakers struggled to pass an emergency spending bill that Republicans want to use to defund Obama's healthcare reform law.

Two can play at that suicidal game!The Economist
Barack Obama should threaten to veto any increase in the debt ceiling unless Congress goes along with his demands. This idea, though utterly dumb, has a formal logic to it.