1. FED

1) Goodfriend Says Fed Needs More Data Before Increasing Assets

The Federal Reserve should wait to see whether slowdown develops into a more serious contraction and whether disinflation develops into an incipient deflation before starting a third round of quantitative easing, or QE3, according to Marvin Goodfriend, a former Richmond Fed policy adviser.

Retail sales in the U.S. unexpectedly stagnated in August as a lack of employment and limited income growth restrained demand, highlighting the risk the economy will stall. Other recent reports showed payrolls didn’t grow in August and manufacturing expanded at the slowest pace in two years.

2. ECB

1) Britain to Sue ECB Over Planned Restrictions on Clearing Houses

Britain will sue the European Central Bank over plans to prevent some euro-denominated securities from being cleared outside the 17 countries that share the currency, in the first such move by a government.

A change to the ECB’s location policy would force some London-based houses that clear euro-denominated products to relocate to a euro-region country.

2) Swiss Currency Moves Make Life Even Tougher for ECB: Euro Credit

The Swiss National Bank’s move to cap the franc’s strength is complicating European Central Bank efforts to contain the euro region’s debt crisis.

A decline in buyers of Italian and Spanish securities will put pressure on the ECB to buy more of the nations’ bonds and lower their borrowing costs.

Analyst Comment: The SNB’s move may potentially reduce demand for riskier assets such as high-yielding euro-denominated government bonds. In the past, some investors who bought riskier euro assets could hold the franc to mitigate downside risks. But nowadays, the franc can no longer be used as a safe-haven hedge.

3) ECB Lends U.S. Dollars to Two Banks as Markets Tighten (Correct)

The European Central Bank said it will lend dollars to two euro-area banks tomorrow, a sign they are finding it difficult to borrow the U.S. currency in markets.

The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years.

U.S. funds are cutting their holdings in European banks on concern the institutions may face funding problems as the sovereign-debt crisis escalates.

Analyst Comment: U.S. money-market funds have stopped rolling over dollar loans of European banks. I wouldn’t be surprised if demand increased in the next weeks.

3. RBA

1) Swan Restricts Central Bank in Setting Pay With Autonomy

Australia’s central bank, which pays its governor more than Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet combined, will for the first time lose its sole power to set compensation for its board and executives, Treasurer Wayne Swan said.

4. ECO

1) Sarkozy, Merkel Say Greece’s Future Is to Remain in Euro Region

French President Nicolas Sarkozy and German Chancellor Angela Merkel said they are “convinced” Greece will stay in the euro area as they faced international calls to step up efforts in fighting the region’s debt crisis.

The euro rose after the leaders of Europe’s two biggest economies issued a statement yesterday following a telephone conversation with Greek Prime Minister George Papandreou. Papandreou committed to meet deficit-reduction targets demanded as a condition for an international bailout.

European governments are aiming to ratify a July 21 agreement to bolster the euro region’s bailout fund and extend a second rescue to Greece. Investor skittishness over the spread of the debt crisis has raised banks’ funding costs and roiled markets worldwide.

Analyst Comment: The remarks were a good thing. They’re just words at this point, but that’s why we’re seeing the euro pop against the dollar.

2) Bill Ackman Bets Hong Kong Will Let the Dollar Appreciate

William Ackman, founder of hedge fund Pershing Square Capital Management LP, said he’s placed a wager that would profit if Hong Kong allows its currency to appreciate against the dollar.

“It’s a small trade, but if it’s successful, it will be our most profitable,” said Ackman.

3) U.S. Economy: Retail Sales Stall on Lack of Job Growth

Retail sales in the U.S. unexpectedly stagnated in August as a lack of employment and limited income growth restrained demand, highlighting the risk the economy will stall.

Signs inflation is limited may make it easier for Fed officials to ease monetary policy further if they deem it necessary. The producer price index was unchanged after a 0.2 percent increase in July, the Labor Department said. The core measure of wholesale prices rose 0.1 percent.

Analyst Comment: Consumers are being more cautious given all the economic headwinds. Policy makers have to be focused on growth because growth seems to have come close to stalling in August.”

4) Euro Bonds Won’t Cure What Ails Europe: Kotz, Krahnen and Leuz

These securities are a bad idea not because they would provide transfers to weaker member states, as is often pointed out, but because the transfers would be neither transparent nor controllable. Indeed, euro bonds would cement Europe’s structural problems.

Any lasting solution must clearly distinguish between illiquidity, insolvency and structural deficiencies, and should address each in a transparent manner, considering the political processes involved. By contrast, the euro bond proposals fail to differentiate between these issues and, as a result, hurt transparency and incentives.