Scotland, Federal Reserve, ECB And More

The  Scotland vote today is the main event, and as important as a “yes” vote would be, it is not the only event today.  And there is not much more to add to the discussion.  While the polls remain a statistical dead heat, the wisdom of crowds work implies giving more weight to the bookmakers and the markets, which clearly favor a “no” victory.  There is some genuine concern that Scottish referendums will be a recurring theme (see Quebec) on a small victory for the unionists.  Such fears coupled with the fact that some have already positioned for such an outcome may, may curtail the positive sterling response to the a “no” vote.  

The results will not be known until the Asian time zone on Friday.  Today, the markets will continue to digest yesterday’s FOMC meeting.  There was a clear difference between the FOMC statement (dovish) and the dot plot (hawkish).  We suggest that they measure two different things, and it derives from the structure of the Federal Reserve.   The FOMC minutes and the dot plot picks up the wide range of views at the Federal Reserve.  This means all of the regional presidents.  

The FOMC statement is about the voting members, and it reflects the Board of Governor views, and especially the Chair.  In terms of policy signals, we put more weight on the statement than the dot-plot and minutes.  This is consistent with our general approach to watching the Fed.  Some opinions are more important than others in revealing the policy signal.  Yellen, Fischer and Dudley are the signals and their views are diluted in the FOMC minutes and dot-plot. 

Participation in the ECB’s Targeted Long-Term Repo Operation was dismal.  The take down was 82.6 bln euros.  This is a little less than half of what the median expected. This stopped the euro as it poked through $1.29 as it had been recovering from the post-FOMC slide that bottomed in early Asia near $1.2835. European bonds initially sold off, perhaps on ideas that low participation means less new fuel for carry trades.  However, they recovered, perhaps on anticipation of additional policy response.  Some banks began acknowledging participation.  Those banks that have not paid back as much of the LTRO funds are thought to be the most likely candidates to participate in the TLTRO, and this means Italian and French banks.