1. FED

1) Fed Likely to Ease Policy Further, Barclays Capital Says

While inflation is firming, Fed is likely to take more monetary easing measures at this week’s meeting as labor market conditions aren’t improving, says Barclays Capital in note.   * 10-year/30-year curve is too flat for smaller-scale Operation Twist program that entails modest sales in front end or shifting composition of the portfolio

* Fed will probably focus on 10-year sector

* Recommends switching out of rich 2020 maturity issues in 7- year to 10-year sector into cheap securities such as 2019 maturity issues and Feb. 2020

2) Bernanke Joins King Tolerating Inflation to Revive Economies

Inflation flashing red may be less of a green light for higher interest rates as global growth falters.

The Bank of England has held its key rate at a record low even as U.K. inflation breached its 2 percent target for 21 months. Brazil executed a surprise cut Aug. 31 to safeguard its economy even after inflation quickened to a six-year high.

Policy makers such as Fed Chairman Ben S. Bernanke and Bank of England Governor Mervyn King may be challenging central-bank orthodoxy to replenish depleted toolkits and support recoveries at risk of sliding back into recession.

2. Euro zone Crises

1) Papandreou Meets Cabinet on Crisis as U.S. Trip Canceled

Greek Prime Minister George Papandreou canceled a U.S. visit that was to begin today, saying he needed to remain in the country for a “critical” seven days as European Union creditors prepare to judge whether budget measures will be enough to avert a bond default.

Greece is rushing to meet demands from international and EU partners that will allow the release of a sixth tranche of loans to prevent default. The government on Sept. 11 announced a levy on properties to help raise 2 billion euros ($2.8 billion) in a bid to show it’s serious about plugging a swelling budget deficit, key to getting a second financing package agreed to by EU leaders on July 21.

2) Euro Bulls Capitulate After Trichet Turnaround Cuts Forecasts

The rebound in the euro and European stocks last week may prove short-lived in the face of increasing pessimism over the region’s debt, if money-market and derivative trading are any indication.

European Union and International Monetary Fund inspectors will speak with Finance Minister Evangelos Venizelos today to judge whether the government is eligible for its next aid payment due next month and on track for a second rescue package approved by EU leaders July 21.

Analyst Comment: The euro weakness is legitimate and justifiable. The stark reality is that Greece is never going to pay its debt in full and that all the various patch-up jobs are not going to solve it.

3) Europe Bank Bonds Doubt Dollar Lending Success: Credit Markets

European bank bonds signal that investors remain skeptical that a move by central bankers around the world to provide dollars to financial institutions in need will solve the region’s funding crisis.

Euro-region banks’ usual sources of dollar funding dried up on concern they’ll be forced to take losses on bonds sold by Greece and the rest of Europe’s most-indebted countries. In response, the European Central Bank and its counterparts in the U.K., Switzerland, Japan and the U.S. agreed to provide unlimited money to lenders until year-end.

Analyst Comment: It significantly reduces the possibility of a disorderly unwind of positions which certain banks may have had. It doesn’t change the fact that access to short-term wholesale dollar funding for certain banks is disappearing, and will be gone by the end of the year.

4) Spain Riskier Than Bulgaria Signals Rating ‘Wrong’: Euro Credit

Spanish debt is more expensive to insure than Baa2-rated Bulgaria, signaling the euro region’s fourth-biggest economy may not warrant its Aa2 credit status.

The cost of insuring Spanish debt against default fell 2.5 basis points to 369, CMA prices showed on Sept. 16. That compares with 318 for Bulgaria and 195 for Slovenia.

Analyst Comment: The rating agencies have got their head in the sand. Any country where you need the central bank in there supporting the bond market, and an AA rating, suggests something is very badly wrong with the ratings process.

5) Berlin Election Deals Blow to Merkel’s Coalition Crisis Handling

German Chancellor Angela Merkel’s party was defeated in a Berlin state election and her coalition ally lost all its seats after turning skepticism over euro-area bailouts into a campaign theme, stoking government infighting over the debt crisis.

The results in Berlin cap a year in which voters punished Merkel’s coalition over its handling of the debt crisis and adds to her pressure as she struggles to balance domestic fatigue over shouldering euro-region rescues with international calls that she do more to stem the contagion. That’s widening fissures in her government as the three-way coalition descends into open conflict over the euro’s future and financial aid for Greece.

Analyst Comment: The issue now is how long the liberals hold onto the coalition, whether they break it off ahead of time. The FDP are being pushed into the corner more and more, so you can’t rule out that they could pull off something like that to gain from it politically.

3. ECO

1) U.S. Michigan Sentiment Index Rose to 57.8 in September

Confidence among U.S. consumers rose in September from the lowest level since November 2008 as Americans’ views of current economic conditions improved.

Analyst Comment: The freefall is over. Consumer spending looks pretty sluggish, but it’s not seeing the recession-like weakness shown by the confidence numbers.

2) China Home Prices Rise in All Cities as Developers Defer Cuts

China’s new-home prices rose in August in all 70 cities monitored by the government for the first time this year as developers watch policy directions before cutting prices.

Analyst Comment: There’s still no obvious price falls as developers are reluctant to make big price cuts. This is actually the worst scenario because minor price reductions one after another will dampen market confidence.

Asset prices in China’s second- and third-tier cities are still rising rapidly, as local governments are reluctant to place more strict policies. Especially some western and central cities are facing big pressure to pay out debts, while their main revenue comes from land sales.