Today the new President of the ECB, Mario Draghi, established himself as a true leader and moved to undo the damage of the über arrogant Jean Claude Trichet. The two rate increases in the last six months by the European bank were an overshoot of mammoth proportions as the peripherals were in the midst of a severe credit crisis and moving toward austerity budgets. Spain, which maybe in the worst condition of all–21.5% unemployment and a deflating housing market–was not in need of a EURIBOR increase as its mortgage rates float in reference to the bank rate. If Trichet did not understand the depths of the credit crisis then he should have never been the ECB president. It was always reported that the ECB decisions were unanimous, but today’s move by Draghi indicates that Mr. Trichet rode roughshod over the bank’s policy making for it was reported that it was a 25 basis point decision by unanimous consent.
Anyway, the “unexpected ” move by the ECB results in a sizable global equity rally and a move to an overall RISK-ON environment. GOLD was back in the limelight as the market seemed to accept the fact that this will be a more flexible ECB and not be one-dimensional in fighting the inflation demon. Also, after the RATE CUT, the EUR/YEN cross rate rallied to close near its highs. If the Japanese wanted to make a statement on the YEN they should now begin intervening by buying the EURO and selling YEN.
The DOLLAR/YEN is a silly vehicle for the Japanese to concern itself with. It is not CADILLACS that luxury car buyers purchase to replace the more expensive LEXUS, but rather MERCEDES OR AUDI. It seems that demand for high-valued, well-engineered products is determined by Japan versus Germany, especially as the new battleground is China. If the Japanese are serious about the value of the YEN, then the EUR/YEN OUGHT TO BE THE FEATURE.
***As usual, the first Friday of the month brings the EMPLOYMENT reports from Canada and the U.S. Canada’s report will be more important because a very strong number will put pressure on the BOC to raise rates, especially if the risk-on trade becomes globally supported. Last month’s Canadian jobs number was a very strong 61,000, although manufacturing jobs were somewhat weak. Tomorrow the consensus if for a rate of 7.2% from the previous 7.1% and a net job gain of 16,000. Pay close attention to the manufacturing jobs in Ontario to see if there is a pick up in auto production.
The U.S. JOBS DATA IS MEANINGLESS UNLESS THE UNEMPLOYMENT RATE JUMPS UP TO 9.3% or there was a negative number on the NONFARM PAYROLLS. A very weak report would probably set the wheels in motion for an aggressive move on some QE program from a very DOVISH FOMC. Consensus is for 100,000 gain with the STATE AND LOCAL GOVERNMENTS LOSING ANOTHER 20,000 jobs.If we see a large gain of more than 200,000, the EQUITIES will perform best as stocks are looking for any reason to rally. The UNEMPLOYMENT RATE IS EXPECTED TO REMAIN AT 9.1% and average hourly earnings to rise 0.2%. For me, this is the most meaningless unemployment number in many years as the FED has locked itself into a zero rate policy until at least mid-2013.
***The G-20 is in Cannes and the market is anticipating something meaningful in the way of international support for a comprehensive bailout strategy for Europe. Don’t trade on every rumor for even the anchors at CNBC have awakened to the fact that every politician and policy maker is an inveterate LIAR. An unnamed source is anonymous for a reason: They are worthless. CNBC was irritated that everything had to be recanted for the rumors had no substance. Every leak is done for selfish reasons and proves to be without substance. The markets and the media need to mature and understand the need to scoop a story does more harm to the markets that trade around headlines. Until there is an official release from the G-20, be very skeptical and cautious with the news.
***After the ECB rate cut today, it is now important to put the 2/10 German yield curve on our watch list, which widened out 10.5 bais points to +151. If the ECB is going to take a “softer” stance on inflation, the German curve OUGHT to steepen. The BUND has been the repository of the flight-to-safety, especially as it needed as collateral for the REPO market. If this curve were to begin to steepen it may signal some relief in the credit crisis … at least for the near term. The test will come when the G-20 reveals its intentions for a very robust plan, which will lead to a sell off in the BUNDS. Otherwise, it is time to introduce the Trichet regime to the GUILLOTINE. Nice job, Mario Draghi.