Note: This week’s newsletter is being “guest-edited” by John Lothian News Editor-at-Large Doug Ashburn.

Last week’s dismal U.S. employment report seems to have been a “game-changer,” not only in the political arena, but also among Federal Reserve policymakers. After months of suggestions to the contrary, a fresh round of quantitative easing is suddenly back in play as an option. In Congressional testimony today, Chairman Bernanke said that risks to the economy have increased. In his statement, Bernanke said the Fed “is ready to take action if conditions deteriorate” but that there are no current plans to alter current policy. He also expressed concerns about fiscal policy, calling for Congress to work toward long-term fiscal stability, but without “impeding the current economic recovery” (whatever that means).  

Several regional Fed presidents have been making the rounds this week, and it seems clear that the mood is changing. In addition to weak U.S. payrolls, emerging markets, most notably China, India and Brazil, are cutting rates in response to slowing economies. And, of course, there is still pressure in the eurozone. When Operation Twist expires at the end of this month, we may see renewed interest in further Fed action.

Conversation Starter

Prepared Statement of Chairman Ben S. Bernanke Before the Joint Economic Committee, U.S. Congress
Washington, D.C.
June 7, 2012

Economic growth has continued at a moderate rate so far this year. Real gross domestic product (GDP) rose at an annual rate of about 2 percent in the first quarter after increasing at a 3 percent pace in the fourth quarter of 2011. Growth last quarter was supported by further gains in private domestic demand, which more than offset a drag from a decline in government spending.

Labor market conditions improved in the latter part of 2011 and earlier this year. The unemployment rate has fallen about 1 percentage point since last August; and payroll employment increased 225,000 per month, on average, during the first three months of this year, up from about 150,000 jobs added per month in 2011. In April and May, however, the reported pace of job gains slowed to an average of 75,000 per month, and the unemployment rate ticked up to 8.2 percent. This apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter. But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession. If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed, and, consequently, that more-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions.

To read the full statement: http://jlne.ws/KlV5Ar

Bernanke signals no imminent steps to aid economy
BostonHerald.com
Chairman Ben Bernanke said the Federal Reserve is prepared to take further steps to lift the U.S. economy if it weakens. But he didn’t signal any imminent action in testimony before a congressional panel Thursday. Bernanke said the European debt crisis poses significant risks to the U.S. financial markets. And he noted that U.S. unemployment remains high and the outlook for inflation subdued.
http://jlne.ws/KiLSqx

Bernanke’s Disappointing Testimony
by Mark Thoma, Forbes
Here are two views on Bernanke’s testimony, one from me and one from my colleague Tim Duy.
http://jlne.ws/Lp7o2q

TREASURIES-U.S. Treasuries higher after Bernanke testimony
Reuters
U.S. Treasuries followed a three-day retreat with only modest gains on Thursday after Federal Reserve Chairman Ben Bernanke said the U.S. central bank was ready to shield the economy if financial troubles increased but offered few hints that more monetary stimulus was imminent.
http://jlne.ws/MgDOee

Lead Stories

China cuts key interest rates to boost growth
BBC News
China has cut its key interest rates for the first time since 2008, in an attempt to boost its slowing growth. The benchmark one-year loan rate was cut by a quarter of one percent to 6.31% while deposit rates were cut from 3.5% to 3.25%.
http://jlne.ws/Nkb7Pm

Federal Reserve Members See No Need to Act Now
NYTimes.com
Three members of the Federal Reserve’s policy-making committee indicated in separate speeches Wednesday that recent economic data, while troubling, does not yet justify an expansion of the Fed’s economic aid campaign.
http://jlne.ws/LvO4Pz
**DA: China weakness, horrendous U.S. payroll number and eurozone woes are not quite enough.

Fed’s Yellen sees possibility of more stimulus
CNN.com
Federal Reserve Vice Chair Janet Yellen has reiterated her view that further action by the central bank might be necessary to stimulate the sputtering U.S. economy. “An extended period of highly accommodative policy is necessary to combat the persistent headwinds to recovery,” Yellen said Wednesday in remarks prepared for delivery to the Boston Economic Club Dinner.
http://jlne.ws/KABkte
**DA: Dissention in the ranks?

Fed’s Beige Book Indicates No Need For QE3
TheStreet
Assuming Federal Reserve Chairman Ben Bernanke read the Beige book, he should know not to echo the comments made yesterday by Atlanta Fed President Dennis Lockhart and Vice Chairwoman Janet Yellen. The theme of the Beige Book states that “the economy expanded at a moderate pace between early April and late May.” To me this says there is no need for additional Federal Reserve easing June 20.
http://jlne.ws/LbZ9CT
**DA: Well, that settles it, right?

Fed: Let’s Twist again like we did last summer?
CNN Money
The Federal Reserve’s next policy meeting is a two-day session concluding on June 20. That’s just ten days before the Fed’s Operation Twist policy — swapping short-term bonds for ones with longer duration to help keep 10-year and 30-year bond yields low — expires. Up until recently, few expected the Fed would seriously consider extending Twist.
http://jlne.ws/LoAyPg
**DA: In just a few weeks’ time, Twist has gone from “no more needed” to “an option on the table.” Stay tuned.

Federal Reserve reviewing JPMorgan risks: Tarullo
Reuters
The Federal Reserve is working with the Office of the Comptroller of the Currency to oversee risk reduction in the portfolio of JPMorgan Chase &Co that recently incurred at least $2 billion losses, Federal Reserve Board Governor Daniel Tarullo told a U.S. Senate panel on Wednesday.
http://jlne.ws/KAypRp

Low Interest Rates Crimp Retirement Plans, Survey Finds
NYTimes.com
Rising pessimism about the course of the economy, along with low interest rates and increasing health care costs, are squeezing Americans’ retirement plans, a new survey finds. A third of the investors surveyed said low interest rates would cause them to delay retirement. And 45 percent of nonretirees and about a third of retirees said they feared that the low rates might result in them outliving their money in retirement, the survey from Wells Fargo and Gallup found.
http://jlne.ws/KljUfT
**DA: The downside of stimulus is the discouragement of risk-averse investing. When retirees refuse to spend, entire industries suffer.

As US interest rates sink, insurers feel pressure
Reuters
Life insurers are finding that longer-term U.S. interest rates are even lower than they expected and are likely to stay that way for some time, forcing them to shutter some businesses and sell others. When the Federal Reserve launched “Operation Twist” in September to lower long-term rates, actuaries and analysts said insurers would have to accept weaker investment returns, which along with premiums account for most of insurers’ profits.
http://jlne.ws/LolcKF
**DA: Says Doug French, managing principal of E&Y’s New York insurance practice: “If we look at the low-interest-rate environment, it’s probably going to have transformational aspects to the business. You sooner or later have to sit down and rethink the markets you’re in, the customers you serve and the products you sell. It can’t be business as usual.”

Three Reasons Why the US Dollar is Rising
Resource Investor
By all accounts, the US dollar should be the functional equivalent of a Zimbabwean bill. The Fed has pumped trillions into the worldwide financial system as part of misguided stimulus efforts that should be incredibly inflationary. Yet, instead of a disastrous repeat of the Weimar Republic, the US dollar has strengthened considerably.
http://jlne.ws/MMyzFZ
**DA:  MV=PQ, just like we learned in Econ 101.

Events

ISDA Conference: Fundamentals of OTC Derivatives Clearing, June 11, Boston
International Swaps and Derivatives Association
This Monday, June 11, 2012, ISDA will be hosting a one-day conference on OTC clearing. Topics to be covered include margining, regulatory requirements under Dodd-Frank and EMIR, documentation issues and more.
http://jlne.ws/NNWYb9

Economic News

Bank of England Maintains Interest Rate and Stimulus Program
NYTimes.com
The Bank of England decided Thursday to keep its benchmark interest rate unchanged at a record low as the British economy struggles to recover amid the government’s austerity program and troubles in the euro zone.
http://jlne.ws/MiYNxu

Europe’s Central Bank Leaves Interest Rate Unchanged
NYTimes.com
The European Central Bank left its main interest rate unchanged Wednesday, choosing to put the onus on political leaders to address increasingly dangerous tension in the euro zone.
http://jlne.ws/KXNBpM

Australian central bank cuts interest rates to 3.5%
Yahoo! News
Australia’s central bank cut interest rates by 25 basis points Tuesday to 3.5 percent amid fears over weakness in Europe and easing growth in key trade partner China.
http://jlne.ws/L0eGqB

SBI cuts fixed deposit rates by 0.25%
The Times of India
Ahead of RBI’s mid-quarter review of the monetary policy later this month, country’s largest lender State Bank of India (SBI) on Thursday slashed fixed deposit rates by 0.25 per cent across select maturities.
http://jlne.ws/Mdk3RJ

Brazil Futures Yields Fall as Annual Inflation Slows to Below 5%
Bloomberg
Yields on Brazilian interest-rate futures dropped after a government report showed annual inflation unexpectedly slowed to less than 5 percent for the first time since 2010. Traders are betting policy makers will cut the benchmark Selic target lending rate by a half-percentage point to 8 percent next month, extending the most aggressive rate reductions among G-20 nations.
http://jlne.ws/MMbvY7
**DA: For more on Brazil, the Real and the Selic rate, see my recent JLN FX column on the subject.

EU and Germany discuss a limited bailout for Spain
NASDAQ.com
European officials are considering a bailout to aid Spanish banks that unlikely loans to Greece, Ireland and Portugal, would require few austerity measures beyond reforms already agreed with the EU, according to a FT report.
http://jlne.ws/NkDrBm

Greek unemployment hits 21.9 pct in March
Fox News
Greece’s unemployment shot up to 21.9 percent in March, rising sharply from the 15.7 percent rate in the same month last year and up from 21.4 percent in February, the country’s statistics agency said Thursday.
http://jlne.ws/MMQ1dx

Muni Bond ETFs as Alternative to Treasuries
Yahoo! Finance
Municipal bonds haven’t been trashed by massive defaults as some analysts predicted. Muni bonds and exchange traded funds are even thriving as an alternative to historic low-yielding Treasuries.
http://jlne.ws/KlPFFy

Carney: No tax cut extension for rich
UPI.com
White House spokesman Jay Carney said Wednesday President Obama will not support extending tax cuts for those making more than $250,000. During a flight to the West Coast aboard Air Force One, Carney said in response to questions the president will oppose Republican efforts to extend the cuts, even if that means tax rates for everyone will increase.
http://jlne.ws/MjKbxQ

Distressing Mortgage Conditions – Real Time Economics
Wall Street Journal
Though mortgage distress peaked in 2010, many areas of the country continue to struggle and some regions are getting worse, according to data presented by Federal Reserve Bank of St. Louis President James Bullard.
http://jlne.ws/JQou4f

Firms & Banks

Treasury to auction off TARP investment in Cole Taylor – Finance News
Crain’s Chicago Business
The Treasury Department said today that it will sell the preferred shares it holds in the parent of Cole Taylor Bank under the Troubled Asset Relief Program, set up four years ago to rescue the nation’s banking system
http://jlne.ws/LfH7RS

Fannie Mae names Timothy J. Mayopoulos as new CEO
The Washington Post
Government-backed mortgage giant Fannie Mae on Tuesday announced that it had tapped Timothy J. Mayopoulos, the firm’s general counsel and chief administrative officer, as its new chief executive.
http://jlne.ws/MjJswK

Auctions & Statistics

Rates fall at weekly US Treasury bill auction
BusinessWeek
Interest rates on short-term Treasury bills fell in Monday’s auction with rates on three-month bills dropping to the lowest point since January. The Treasury Department auctioned $30 billion in three-month bills at a discount rate of 0.075 percent, down from 0.085 percent last week.
http://jlne.ws/NkxiFi

Spain has successful bond sale after tough week
The Seattle Times
Spain raised EUR 2.1 billion ($2.62 billion) Thursday from the bond markets – but investors demanded a higher interest rate out of concern that the country’s troubled banks were weighing heavily on government finances.
http://jlne.ws/KRxcDv
**DA: I guess it depends upon one’s perspective.

Spain Sells The Smallest Amount Of 10 Year Bonds Since 2004 At A Yield Over 6%
ZeroHedge
On the surface, the overnight Spanish bond auction, in which the country sold a tiny €2.1 billion of 2, 4 and 10 year bonds was a success, simply because it wasn’t a failure. Anywhere below the surface and things get fishy.
http://jlne.ws/LoLYmf

France sees borrowing costs fall at bond auction
BusinessWeek
France’s government saw its borrowing rates drop in an auction of long-term bonds Thursday, an indication of investor confidence in the country despite concerns over the financial stability of some of its neighbors, such as Spain. The treasury raised a total (EURO)7.8 billion ($9.7 billion) in the auction, with (EURO)3.5 billion of that coming from the issue of 10-year bonds. It paid an interest rate of 2.46 percent for the 10-year notes, down from 2.96 percent the last time it auctioned such bonds a month ago.
http://jlne.ws/KRKm3u

Regulators

Senate Republicans offer bill to fix student loan interest rates
The Hill’s On The Money
Two Senate Republicans introduced a bill on Wednesday designed to provide a long-term fix to student loan interest rates. Sens. Tom Coburn (R-Okla.) and Richard Burr (R-N.C.) want to apply a fixed-variable rate on all federal student loans first disbursed after July 1. The bill would require the interest rate to be equal to the bond equivalent rate of 10-year Treasury bills auctioned at final auction prior to June 1 plus 3 percent.
http://jlne.ws/LvG694

Simon Johnson: Will There Be a Meaningful Volcker Rule?
NYTimes.com
The Dodd-Frank financial reform legislation of 2010 stipulates that banks and the corporate entities that own banks should get out of the business of “proprietary trading.” That term refers to investments, often highly risky, that very big banks got into the habit making on their own account, i.e., unrelated to anything that their customers asked them to do.
http://jlne.ws/LF2yuD

Oppenheimer Funds settles with SEC over bond-fund allegations
The Denver Post
OppenheimerFunds Inc. has agreed to pay $35 million to settle charges from the U.S. Securities and Exchange Commission that two of its bond funds misled investors about their strategy and the heavy losses they were suffering during the financial crisis in 2008.
http://jlne.ws/LAZZtg

Banking fix didn’t work—Nicole Gelinas
NYPOST.com
Twenty-three months after President Obama gave us Wall Street “reform,” the results are in — and they’re not pretty. The Dodd-Frank law didn’t end “too big to fail”; it just gave Washington someone new to blame for the next blowup-and-bailout, namely the hapless regulators.
http://jlne.ws/MdNAef

Fitch: Swaps Push-Out Rule Effects Limited for Major Banks
Business Wire
Fitch Ratings believes that the swaps push-out rule, or “Lincoln amendment,” to the Dodd-Frank Act (DFA) may ultimately constrain derivatives activity among the largest U.S. commercial banks, but its impact on bank credit profiles will likely be limited.
http://jlne.ws/Mjznjf

CFTC Said to Plan June Vote on Expanding Reach to Overseas Swaps
Bloomberg
The U.S. Commodity Futures Trading Commission may vote June 21 to propose guidelines for extending the reach of Dodd-Frank Act rules to overseas swaps trading, according to two people briefed on the matter.
http://jlne.ws/L0D0bW

OTC

ISDA to Partner With Markit for System to Aid Compliance
Businessweek
The International Swaps & Derivatives Association said it will partner with Markit Group Ltd. to develop a system enabling counterparties to amend over-the- counter derivatives documentation in order to help compliance with Dodd-Frank regulations.
http://jlne.ws/KiMCfg

Adjusted OTC Derivatives Volume Declines and Central Clearing Increases, According to ISDA
BusinessWire
The International Swaps and Derivatives Association, Inc. (ISDA) published today its analysis of the over-the-counter (OTC) derivatives market based on year-end 2011 statistics.

According to the ISDA analysis, adjusted volumes of OTC derivatives declined by 10.3 percent from June 2011 to $440 trillion.
http://jlne.ws/MdUnEB

Default Swaps in U.S. Fall on Central Banks Stimulus Speculation
Bloomberg
An index of U.S. corporate credit risk declined by the most in more than two weeks as investors anticipate measures from policy makers to stimulate growth. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, dropped 4 basis points to a mid-price of 121.8 basis points at 4:55 p.m. in New York, according to prices compiled by Bloomberg.
http://jlne.ws/MgA78l