1. FED

1) Kasman, Hubbard Say Fed Inflation Lenience May Hurt Credibility

“The Fed has to be clear about what its medium-term objectives are,” Kasman, chief economist at JPMorgan Chase & Co. said today at the Bloomberg Markets 50 Summit in New York. Raising the Fed’s target to 4 percent annual inflation from 2 percent “will have consequences in terms of its credibility, in terms of the way economic decisions are made in the U.S., which over time will do an awful lot of damage.”

2. Euro zone Crises

1) Euro Set for Weekly Gain as ECB Plan Eases Banks’ Funding Woes

The euro was set for its first weekly gain against the greenback in three weeks on prospects costs for dollar funding will drop after the European Central Bank said it will lend U.S. currency to euro-area banks.

The ECB said it will lend dollars to banks in the euro zone in a series of three-month loans. The Frankfurt-based bank said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year.

The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, declined 16.5 basis points yesterday.

Analyst Comment: The announcement helped bolster risk sentiment and sent the euro up quite a bit. Potentially it will ease those funding pressures further.

Good news is the banks get their dollar funding. Bad news is that the situation has gotten this dire.

2) Trichet Urges Euro Officials to Get ‘Ahead of Curve’ in Crisis

European Central Bank President Jean-Claude Trichet pressed euro-area governments to take decisive action to halt the debt crisis, after the ECB bought them more time by extending an emergency lifeline to lenders.

“We are not back to ‘business as usual’ as some thought some months ago,” Trichet said late yesterday in Wroclaw. “We call all authorities to implement swiftly all decisions and to be constantly ahead of the curve.”

3) Correlation Bets Climbing as Europe Overwhelms Earnings: Options

U.S. options traders see almost no chance that earnings, dividends or buybacks will influence stock prices through the end of 2011, instead placing record bets that equities move in lockstep in reaction to Europe’s debt crisis.

Analyst Comment: Europe is a big macro issue and it’s so pervasive that at the top of investors’ minds, there’s nothing to do with individual companies. There’s been no individual stock selection going on. I’m just buying stocks or I’m selling stocks, versus buying IBM and selling Hewlett-Packard.

4) Spanish Bonds Decline Before Debt Auction; Bunds Little Changed

Spanish 10-year government bonds declined before the sale of as much as 4 billion euros ($5.5 billion) of debt, testing demand for the securities after the European Central Bank started buying them last month.

German two-year notes erased a decline after UBS AG, Switzerland’s largest bank, said it made a trading loss of about $2 billion, underpinning demand for the safest assets. Spain plans to sell debt maturing in 2019 and 2020 today, while France auctions as much as 9.8 billion euros of debt. Yields on two-and 10-year German bunds fell to euro-era records this week as speculation Greece may default boosted safety demand.

Analyst Comment: The primary focus is on the Spanish and French auctions. There should be some concession before that. We’re still in an environment where the potential for upset is rife.

5) Germany Overtakes Spain in Debt Wagers Amid Crisis: Euro Credit

Bets on German credit quality overtook those on Spain for the first time in a year as the mounting cost of bailing out the region’s most indebted nations infects Europe’s largest economy.

Germany has provided the biggest share of the rescue packages for Greece, Ireland and Portugal, and Chancellor Angela Merkel is struggling to maintain taxpayer support after a string of election defeats. Attempts to end the two-year-old crisis failed to stop the rot spreading to Italy and Spain, which now risk missing deficit-reduction targets.

Analyst Comment: It’s an acknowledgement that the pressure is moving into the core. The more the dithering, the bigger the cost.

6) Billionaire Cisneros Seeking to Buy Spanish Assets Amid Crisis