German Bundesbank President Axel Weber is developing a reputation as a leading indicator for the European Central Bank.

In the same way as a pickup in confidence can foreshadow a pickup in the economy, Weber’s comments about the direction of ECB policy this year have tended to be borne out by events.

The ECB’s broad hint on Nov. 5 that it will drop its super-long, one-year loans to euro zone banks next year follows a similar suggestion by Weber a week earlier.

And earlier this year, the 52-year-old publicly argued (and succeeded) for the ECB not to cut its main interest rate below zero, or follow other central banks in adopting a massive asset-buying programme.

Some economists wonder whether Weber – seen along with Italy’s Mario Draghi as an heir apparent to  ECB President Jean-Claude Trichet in 2011– just dares to say publicly what others are already thinking, showing little regard for the unwritten rules that make Trichet the official barometer of ECB opinion.

But others say Weber’s record this year shows he is successful at convincing others to follow his lead. A former academic, he can talk eloquently about the nitty-gritty of economic analysis and as the representative of the euro zone’s biggest economy and banking sector, his opinion carries weight. 

“When Weber speaks, the market does tend to listen,” says Societe Generale economist James Nixon, a former ECB staffer.

It must be a strange experience for non-European officials to talk to Europeans at events such as this weekend’s Group of 20 nations’ financial conference in St. Andrews, Scotland. If you want to make a deal with Europe, whom do you speak to? At the table there is Germany, France, Italy and Britain, a representative of the country that holds the rotating EU presidency (currently Sweden) and a representative of the executive European Commission.

The famous quote from Henry Kissinger “Who do I call if I want to call Europe?” is just as valid in economic policy-making as it is in foreign or defence policy.

In theory, the 27-nation European Union prepares its common position for global forums like

the G20 at ministerial meetings or summits shortly before the G20. So it should be enough to have just one pan-EU delegation that would present that common view, by necessity an internal EU compromise. Somehow, it is not.

Sources taking part in the meetings say the four biggest European economies that guard their individual seats at the G20 do not always speak with one voice. Or toe the EU line.

How does that make the EU representative look? Or the European Union as a whole? Why would anybody want to do a deal with the EU if its biggest members themselves undermine its authority by the very fact that they don’t trust a single delegation to present their joint view? Doesn’t that mean that, in fact, there is no common view? Then why bother with going through the motions of preparing a joint position before a G20?

The EU is an area with the biggest gross domestic product in the world – almost one third of world output and much above the United States, according to 2008 IMF data. It has half a billion citizens, making it the third biggest in the world after China and India.

European Central Bank President Jean-Claude Trichet  signalled on Thursday that the days of 12-month loans to banks will come to an end soon and that will be the start of a gradual exit from unlimited liquidity injections.
“The market, as far as I see, it is not expecting that we will prolong (our) one-year operation, I will say nothing to dispel this present sentiment of the market,” Trichet said in a news conference after the 16-country bloc’s central bank kept rates at 1 percent. “The enhanced credit support … was not for eternity,” he added.

The ECB started the 12-month cash injections to help the ailing banking sector back into form, and banks reacted with joy, snapping up nearly half a trillion euros of cheap money in the first such operation in June.

But Trichet also had soothing words for banks addicted to cheap money. The ECB would keep interbank interest rates well below the main refinancing rate, he said.  But it seems banks will have to learn to play again with each other rather than relying only on the ECB’s largesse.

And before signing off, Trichet also had words of advice for the media.  “This is exactly the same language as we always have utilised. Everybody knows that, so no news there.”

That advice seemed fall on deaf ears, as most media, including Reuters, would make a lot of hay out of his words on 12-month liquidity injections and keep it the centrepiece of their coverage.

Reuters is blogging live from the G20 meeting in St Andrews, Scotland.  Finance ministers and central bankers will seek to firm up a plan to rebalance the world economy, aiming to beat out how to set national policy goals and make sure everyone keeps to them. In addition countries are expected to push individual concerns, from Brazil’s about FX reserves to France’s about bankers’ bonuses.

Chile, UAE, Singapore, Azerbaijan, Ireland and Norway claim top rankings on the latest transparency index, published by SWF Institute. At the bottom of the ranking is Venezuela, Oman, Nigeria, Mauritania, Kiribati, Iran, Brunei and Algeria.

The Linaburg-Maduell index is calculated with 10 principles — such as whether the fund provides up-to-date, independently audited annual reports, or whether it provides clear strategies and objectives. It also gives points on whether the fund gives ownership percentage of company hodlings, total market value, returns and management compensation.

Enhancing transparency is a key task for sovereign wealth funds, whose often opaque operations have come under heavy criticism by some Western politicians who suspect them of investing with political, rather than commercial, motives.

In fact in the recent meeting of the world’s leading sovereign wealth funds, only Norway, Chile, New Zealand agreed in advance to speak to Reuters on the sidelines; when contacted on the ground China also spoke. Others either declined to comment at all or did not return email.

(Source: SWF Institute; www.swfinstitute.org)

Interesting dilemmas facing G20 countries as their finance ministers and central bankers get together on the golf ball strewn Scottish coast ( a meeting in St Andrews we will be Live Blogging on MacroScope, by the way).

First, you have the Brazilians who are worried about hot money and have already slapped a tax on foreign investments in domestic bonds and stocks in order to cool down capital inflows.  They want the G20 to take action against what their central bank chief calls “imbalance- and bubble-building”.

Next you have the Americans and other big economies who know that the huge amounts of stimulus they have put into the world economy have to be removed eventually. They are not ready to do it yet, but expect the G20 countries to discuss how they are going to “sequence” the great unwinding.

And then there is Argentina, which is not alone in noticing that talk of unwinding tends to put investors on edge.  Its central bank governor wants the big countries to be careful, fearing a rapid reversal of stimulus policies could mean big outflows in emerging market countries such as, er, Argentina.

So a tricky balance, a super-sensitive investor audience, and plenty of domestic politics. Fore!

Henrique Meirelles, Brazil’s highly rated central bank president, gave unusual insight into current thinking at the International Olympic Committee in a speech in Oxford the other night.

Diverging from his main theme on Brazil’s remarkable journey from economic basket case to emerging market superpower, Meirelles said that he had gone to Copenhagen last month as part of Rio de Janeiro’s successful bid for the 2016 Olympics. The reason: The IOC asked him to come.

Meirelles said that the IOC knew that Brazil currently had all the conditions needed to host the Games, but wanted to know about how predictable it was that this would carry through over the next seven years. “They wanted to know what is really happening,” he said.

Essentially, the IOC wanted to check with the top economic manager that the country’s finances will still be shining when the Games are held.

 Perhaps they were thinking of London 2012.

Inflation may not be at the forefront of worries about economy for now, but it’s certainly in the back of many investors’ minds. Not that anyone thinks price increases will be reinforced by the labor market, as per the old “wage-push” theory. A new report from the International Labor Organization showed that wage growth continued to decline around the world in 2008, falling to 1.4 percent last year from 4.3 percent in 2007. The UN group also suggested things have gotten worse this year.

The picture on wages is likely to get worse in 2009 – despite the beginning of a possible economic recovery.   Compared to the annual average of 2008, the real wages in the first quarter of 2009 fell in more than half of the 35 countries for which recent data is available.   The downward trend in wages raises some questions about the extent to which the consumption of workers and their families will be able to sustain aggregate demand for economic production once the effects of government rescue packages peter out.

This trend has not, however, succeeded in calming those spooked by unprecedented monetary and fiscal stimulus from governments and central banks around the world. Indeed, inflation-hedging is creating market niches all of its own. The Treasury, for instance, is expected to bring back 30-year Treasury Inflation Protected Securities, or TIPS, as part of its quarterly refunding announcement on Wednesday. Gorge Goncalves at Cantor Fitzgerald notes:

The Treasury could expand its TIPS offerings and or bring back the 30-Year TIPS to help finance the federal debt needs.  In the latest dealer questionnaire the Treasury asked about potential changes to the TIPS program including the replacement of the 20-year TIPS with a new 30-year TIPS security. 

Bond giant PIMCO, in the meantime, has introduced its own new anti-inflation fund, which it says is composed of a mix of TIPS and municipal bonds. John Cummings, who will manage the fund, offers some insight into the reasoning behind its creation.

With growing U.S. deficit projections and continued economic uncertainty, investors are facing the potential for higher taxes, elevated financial risks and the need to protect the purchasing power of their investments against inflation over time. 

BofA Merrill Lynch Global Research economist Ethan Harris thinks all the talk of a Federal Reserve rate hike is just that — talk. Harris, a former Federal Reserve Bank of New York economist, said much of the recent hawkish commentary has come from presidents of the regional Fed banks, and that may not be indicative of the thinking on the Fed’s board.

“The signals don’t  come from Reserve Bank Presidents or advisers,” Harris wrote in a note to clients. “They come from either the overall committee — in the form of the official statements — or from the core of the committee — that means (Chairman Ben) Bernanke, (Vice Chairman Donald) Kohn, and to a lesser extend, New York President (William) Dudley.”

The Fed starts its two-day policy-setting meeting on Tuesday, and Harris is certainly not alone in thinking they’ll stay the course, keeping benchmark interest rates near zero. In fact, BofA Merrill thinks it will be the European Central Bank that hikes before the Fed.

“The bottom line is that faced with roughly the same economic backdrop — very low core inflation, moderate headline inflation and a large but slowly closing output gap — we expect the ECB to be more hawkish than the Fed,” they wrote. “We expect a replay of the summer of 2008, when the ECB hiked in response to high headline inflation, but Bernanke held back the Fed for fear of fragile financial conditions. Of course, thankfully, a replay of the fall of 2008 is unlikely.”

Conflicting signals from Fed speak have central bank watchers back to playing the word game, adding renewed weight to every nuance that can be gleaned from official speeches and pronouncements. There is good reason for the mixed messages. Fed policymakers face a tricky task trying to ensure their commitment to an accommodative stance while also having to assure investors and the public that they will remove the punchbowl before the party gets out of hand.

Eric Lascelles at TD Securities applies a little physical mechanics to the study of Fed chatter.  

The contemplation of signal-to-noise ratios is usually the exclusive domain of electrical engineers. But this subject has become of increasing relevance to economists due to the sheer number of Fed Governors and Presidents who are now proffering their myriad views on a daily basis. It has become increasingly difficult to separate what constitutes a reliable signal of future monetary policy from the inconsequential noise. The monetary policy signal-to-noise ratio is currently very low. This partly explains why expected bond market volatility remains so high – central bankers as a collective are not offering anything close to a clear path forward.

Lascelles errs on the side of dovishness, telling his readers to focus on what Chairman Bernanke has to say.  “The TD view remains that the Fed will surprise many in how long it manages to remain on hold, with a first hike coming in Q1 2011.”

Recent press reports alluded to the possibility that the Fed might be pondering some shift in its language, either removing or moderating its vow to keep rates low for an “extended period.” But former Fed Governor Larry Meyer, now at Macroeconomic Advisors, says all the talk about a verbal baby step toward tightening is just that.

We see an implicit cost-benefit analysis taking place when it comes to considering any discussion on language. The benefits (added flexibility) are unclear, in that a subset of the Committee may feel that the current language is sufficiently vague that it does not stand in the way of an earlier tightening, if warranted by prevailing conditions. On the cost side of the ledger, some members will be very worried about an adverse market impact from dropping either the “extended period” or the “exceptionally low” terms. Taken together, these cost-benefit considerations would suggest somewhat reduced odds that language issues will be prominently discussed at this meeting and an extremely low probability that the language will be changed.

Does that mean that allusions to a rapid eventual exit, first floated by Fed Governor Kevin Warsh, are premature? Not if the Fed feels it needs to dampen inflation expectations, which would be understandable with today’s GDP report reading for the third quarter coming in at 3.5 percent.

Investors will undoubtedly stay tuned.