The unemployment report on Friday was much weaker than expected as zero net jobs were created. More disheartening was that average hourly earnings produced a negative number, which failed to confirm and support the earlier released personal consumption data. The equity markets went into risk-off mode as the economy went into the Labor Day weekend in a very fragile state.
Europe has continued to add uncertainty to the global financial milieu as all the primary actors are heading in different directions. Confusion reigns as the ECB asserts one thing; the European Commission asserts another; and Klaus Regling and the EFSF speak a very different language. The Swiss National Bank (SNB) showed up in verbal force as it pledged to peg the EUR/CHF cross rate at 1.20 initiating a move of more than 8% in the USD/CHF rate and a similar move in the EUR/CHF cross rate. The markets don’t know if the Swiss actually spent any money on the actual intervention or if the verbal assault was simply enough to get the long SWISS positions to exit long, profitable trades and do the work for the SNB. The SWISS had been the favorite of European citizens searching for a haven from the turmoil of Europe, but one has to wonder which vehicle will now be deemed to be a worthwhile haven now.
Some think that the SCANDIES–Norwegian and Swedish Kroners–will help fill that role but liquidity in those markets is questionable. It is doubtful that the Asian havens of Singapore and Japan will want to assume the role of international haven by themselves. There is a G-7 meeting this weekend so it is important to watch for market signs, which will presage any move by the developed nations to curtail the appreciation of certain currencies.
GOLD will probably be the DEFAULT choice but be careful as the ultimate repository of value seems to be in a corrective mode. As usual, check your support levels and find your most comfortable level of risk as the daily swings in price become more volatile. When the world’s premier bankers enter a course of massive intervention, the world is truly on a very unstable path and BEGGAR THY NEIGHBOR is” just a shot away.” If the G-20 has any credibility it will be tested soon as to its ability to coordinate global initiatives.
Quick Hitter#1: In today’s BEIGE BOOK, the FED‘s 12 regions reported that growth was tepid although the Western districts were seeing signs of much better growth than east of the Mississippi. One tidbit of interest was that the Chicago Fed reported “robust ethanol production was also driving corn prices higher.” It seems that the FED‘s economists are willing to admit what the ETHANOL LOBBYISTS won’t: Government ethanol subsidies are having a negative impact on food prices.
Quick Hitter#2: Will somebody tell Chicago Fed President Charles Evans to SHUT UP? Impressed with his notoriety after his interview with chief sycophant Steve Liesman, Evans couldn’t stop talking about the enhanced need for FED liquidity to overcome the dismal jobs situation. Yes, Mr. Evans, the financial markets know about the FED‘s dual mandate. Now stop backing Bernanke into a corner by preempting his speeches and let President Obama put forward his proposals for economic stimulus and the use of fiscal policy. It is time to let the leaders attempt to lead and the support group to remain quiet.
Quick Hitter#3: The Bank of Canada held rates steady today, as expected, and cited the weakness in the global economy and the dismal jobs picture in the U.S. BOC Chief Mark Carney was very direct in stating that the European crisis and the end of U.S. fiscal stimulus are very real concerns to undermine global economic growth. The CANADIAN DOLLAR held up and even rallied late in the day as the U.S. stock market gave the LOONIE support in the hope that President Obama will present a very aggressive stimulus program.
Also supporting the CANADIAN DOLLAR was the release of the IVEY PMI, which came in much stronger than expected, 57.6 versus an estimated 48. The LOONIE has been weak versus the DOLLAR and other currencies as commodities are deemed susceptible to a selloff if the RISK-OFF scenario continues to grab hold of the global investment psyche. If the U.S. two-year note is thought to have value, then investors are really in a struggle to determine the worth of anything.
Quick Hitter#4: Tomorrow, the Bank of England and the ECB both announce their interest rate decisions. The BOE is expected to hold rates at 50 basis points as the U.K. is weak from the austerity budget’s impact on the economy. The British pound has been weak this week as there is a sense that the BOE will raise the QE program to 250 billion or more from 200 billion. It is a possibility as the British authorities are nervous after last month’s riots. If the BOE does nothing, the POUND may get a brief rally.
The ECB is to announce 45 minutes later and it is hard to read the enigmatic Trichet who has a difficult situation to sort through. The question will be if Trichet will be led to lower rates in the shadow of the German Constitutional Court’s ruling that gave legal support to the Merkel’s policy of providing funds for the EFSF bailout. Germany has stood tall for the moment. What will Mr.Trichet do? Will he admit that he erred by raising rates prematurely and cut NOW, or just drop the entire crisis in Mario Draghi’s hands. The December 2011 EURIBOR contract is pricing in a cut by year’s end. It is time that President Trichet actually listens to the markets and do the appropriate thing. A 50 basis point CUT would probably give him center stage at the G-7 meeting. It is never too late to salvage one’s reputation.
Tags: Bank of Canada, Beige Book, BOE, Canadian Dollar, Charles Evans, default, ECB, EFSF, ethanol, EUR/CHF cross rate, Euro, European Commission, Fed, German Constitutional Court, Gold, Ivey PMI, Loonie, Mark Carney, Merkel, Pound, QE, Scandies, SNB, Steve Liesman, swiss, unemployment