Friday’s weaker than expected JOBS REPORT caused AGITA in the BOND and EQUITY MARKETS. Early in the week, the markets had punished the BONDS and EQUITIES as the FOMC MINUTES caused the purveyors of QE3 as a SURE THING to stop, look and listen. The sounds that they had listened to were from the previous speech by Chairman Bernanke as he voiced his deep concerns about the persistent drag of unemployment on GDP. The rush of FED governors and District presidents to any microphone to undermine the chairman’s views caused the market to pause and reconsider its stance on possible FED normalizing rates quicker than the “extended period” language presumed. Stocks were under pressure and U.S. Treasuries were offered as hints of FED buying grabbed traders attention.
The UNEMPLOYMENT REPORT caused the HAWKS to be momentarily silenced as the Chairman gained the upper hand in the growth/jobs debate. This week becomes very important as the EQUITY market seeks to decide whether growth will be so weak that EVEN THE VAST POOL OF LIQUIDITY can’t sustain its recent elevated levels. Not all facets of the UNEMPLOYMENT report were bad as the MANUFACTURING SECTOR showed another increase of 37,000 and state and municipal jobs held steady. ALTHOUGH THE OVERALL JOBS DATA WAS MEDIOCRE, IT MAKES BEN BERNANKE’S EMPLOYMENT SPEECH THE MAINSTAY OF FED POLICY.
Talk of QE may have dissipated but another tepid report will ENSURE THAT THE OPERATION TWIST WILL BE EXTENDED. Chairman Bernanke will not let this “RECOVERY” be undermined by removing all efforts of the FED too soon. The Chairman has staked his reputation on the PORTFOLIO BALANCE CHANNEL and WEALTH EFFECT and its impact on the economy, especially as the uncertainty in Europe continues to grow.
Mr.Bernanke returned home to the South tonight to speak in Stone Mountain, Georgia (he is a South Carolina native). The speech was about the FED‘s role in FOSTERING FINANCIAL STABILITY. After reading the speech, there is nothing in it that will have an effect on present monetary policy. It is about the FED‘s ability to have an impact on the SHADOW BANKING SYSTEM. The CHAIRMAN should just reread Bill White’s paper from the BIS in 2006. It lays out the role of any macroprudential supervisor and the decision to LEAN OR CLEAN. If the FED wants to involve itself with a more active role in the shadow banking realm, then it will have to be willing to prevent the creation of LIQUIDITY BUBBLES AND BECOME PROACTIVE. Until the FED wants to prevent BUBBLES any action will be found lacking. Again Mr. Chairman, LEAN OR CLEAN.
***Today, Brazilian President Dilma Rousseff was visiting the White House and she came with an agenda. President Rousseff would like the U.S. to support Brazil’s desire for a permanent U.N. Security Council seat (doubtful at this time). Secondly, the Brazilians want the U.S. and other developed nations to stop pursuing further QE programs that have caused EMERGING MARKET CURRENCIES TO RAPIDLY APPRECIATE. This issue will also be rebuffed as the Obama administration and members of Congress have enjoyed the increase in manufacturing jobs due to a weakened DOLLAR. After all, it is the Bernanke FED that has unleashed the “TSUNAMI OF CURRENCY” onto the world’s markets.
One area where the Obama administration has met Brazilian desires is in the import of SUGAR-BASED ETHANOL. In a show of leadership, the Obama administration pushed for the removal of import tariffs on Brazilian ethanol, which I believe has helped stabilize CORN PRICES even as South America experienced some drought and China has increased its grain imports. If the U.S. growing season has drought, grain prices will soar but at least the ETHANOL ISSUE WILL NOT BE THE MAIN CULPRIT. Yes, far too much GRAIN is still being used for ETHANOL but the ridiculous subsidies and tariffs are gone. The Brazilian president can at least be assured that Brazilian ethanol exports to the U.S. are at their highest levels in four years. It’s a start. Now, about the World Bank…