It was a day of dueling flapjawing as the European elite was out talking about everything that needs to be done to save the EURO and Sarkozy promising that there would not be any European defaults. Again to paraphrase Jimmy Breslin: Sarkozy is a little man in search of a balcony. The time for public orations is past and the call to action is immediate and real. Global investors don’t want any more rhetoric. Next Friday is considered the day of reckoning but if the EUROCRATS have any sense all the needed policy will have been put in place by the December 9th meeting so that the markets will have absorbed the “shock and awe” and there will be no disappointment.
Mario Draghi was all over the map in his speech as he rambled on about inflation and then stumbled into the language of OUTPUT GAPS as he echoed his academic comrades, for he too is an ALUMNUS OF THE ECONOMIC DOCTORATE PROGRAM AT MIT AND ALSO WORKED AT GOLDMAN. Is there any leading central banker that has not graduated from MIT? Draghi was also hinting at the German position of fiscal responsibility as the first step toward increased ECB participation as a backstop to the DEBT CRISIS. Again, MANY WORDS WERE SPOKEN BUT LITTLE WAS SAID.
*****UNEMPLOYMENT FRIDAY IN THE U.S. and CANADA*****
1. First the markets will get the data from Canada, which is released at 6:00 a.m. CST. This data is important for the window it places on the U.S. jobs picture. Last month, the Canadian data was very weak as 54,000 jobs were lost after a very robust September. The market is looking for a net gain of 18,000 jobs and the UNEMPLOYMENT RATE TO REMAIN AT 7.3%.
It is important to watch the manufacturing jobs component for a sense of the health of the Canadian auto sector, which is highly correlated with the U.S. Canadian jobs growth has been weak in the manufacturing area due to a strong LOONIE but services and natural resources have been very strong. If manufacturing shows any signs of growth it may bode well for a stronger U.S. number.
2. At 7:30 CST the U.S. jobs report is released and the market is now poised for a relatively strong number after Wednesday’s ADP. Consensus is for 125,000 private sector jobs, while state and local governments fall by another 20,000 jobs, which should show a net gain of 105,000. The UNEMPLOYMENT RATE IS EXPECTED TO HOLD AT 9.0% with a growth in average hourly earnings of 0.2%. IF THE NUMBER IS LESS THAN 50,000, the S&Ps and other risk-based assets should sell off but it will be more significant where the markets hold on any disappointing data.
The S&Ps are 8% higher on the week already so if the data is relatively weak and the markets were to hold and rally on weak data it will be a signal that something besides the U.S. growth story is propelling the stock market. Of course, the answer will lie in the WORLD’s CENTRAL BANKS and any real program from Europe. Weak data would be the best outcome so that this week’s rally can be tested for durability. As Wednesday’s concerted action showed, the policy makers of the world are ready to intervene to support the financial system and a weak U.S. number would allow the market to see if they are up to the task.
***The EUROPEAN BOND MARKETS were in rally mode today as the BTP (Italian BOND) futures were very strong as the unwinding of the PERIPHERIES versus the BUNDS continued. More importantly the 2/10 Italian curve continued its move back to a positively sloped curve as it is now 30 points positive and up 75 basis points for the week. The pressure off the Italian 2-year is the best sign for Italy as the near-term pressure is off for the moment. That is why Mr. Draghi should cut rates on the overnight lending rate while the market is showing some positive momentum. It is this large move in the Italian 2/10 curve that catches my eye and sends a message that something significant is being considered.
Even the French 10-years have staged a significant rally and are now below a 100 basis-point difference against the BUND. Does recent BUND weakness signify an unwinding of the BUND‘s haven status or the reality of a GERMAN CAPITULATION ON THE ECB ROLE OF LENDER OF LAST RESORT? A German guarantee on European debt, even coupled with a FISCAL COMPACT, would remove the luster from the BUNDS. This is the ultimate question presently overhanging the markets. Its resolution is the key to near-term trading.
Tags: BTP futures, Bunds, Canada, central banks, debt crisis, ECB, Euro, Eurocrats, French 10-yrs, Goldman Sachs, Italian 2/10 curve, Loonie, Mario Draghi, peripheries, Sarkozy, SPS, U.S., unemployment