First, the U.S. unemployment report was soft although if the ADP stats had not caused the WALL STREET ECONOMISTS to revise their guesstimates upward, the NFP would not have been such a miss from the early consensus. The average hourly earnings were above projections and while MANUFACTURING JOBS were up only 11,000, it was not a negative number. Although it wasn’t a robust number, it certainly wasn’t a huge miss from projections.
The economy is on a TEPID GROWTH PATH and the DOVISH FED PRESIDENTS are crying for added stimulus to help lift unemployment but markets will probably have to wait to Jackson Hole in late August to find out what tools Bernanke may wish to utilize. Bloomberg had an article this morning, “Dealers Declining Bernanke Twist Invitation.” It seems that dealers and investors are wishing to HOARD Treasuries even as the issuance has grown with the budget deficits. There seems to be a fear of a shortage and all types of investors are holding on to the high quality debt instruments.
Also, as the FED BALANCE SHEET HAS GROWN TO$2.87 TRILLION, the amount of HIGH QUALITY COLLATERAL HAS BEEN LESSENED–the REPO market needs collateral to make it work. This raises two important questions about the FED’S OPERATION TWIST:
- Can OPERATION TWIST be a successful in a world in which the SHADOW BANKING SECTOR AND REPO MARKET ACT AS THE MAIN CATALYSTS FOR CREDIT ?
- Can OPERATION TWIST work in a world of FLOATING CURRENCY VALUES as OPPOSED TO FIXED RATE CURRENCIES?
When the FED first implemented OT in 1961, BRETTON WOODS WAS IN FORCE as were many economies operating with exchange controls. In a world where money flows at nanoseconds around the globe, the ultimate impact of OT may be far less dramatic than in 1961. Bottom line is that the markets and Chairman Bernanke may very well be overestimating the potential impact of the TWIST on monetary policy and that in today’s economy the tools of 1961 may be a relic of the STONE AGE.
This is very important to consider for it may mean that Chairman Bernanke may have to reach for a more powerful tool to counteract what may well have been a negative stimulus program.
***German law seems to be conflicting with Merkel’s promises. Der Spiegel online has an article discussing the coming battle of politics with the German Constitutional Court. This is something that NOTES has been writing about for two years. In order for Merkel to deliver on promises made in Brussels, it may mean the abrogation of Germany’s BASIC LAW.
This has always been a problem for the CHANCELLOR and in a Machiavellian sense it may be a card to play if she wants to shun Europe to get reelected in 2013. The FCC (Federal Constitution Court) has been flexible on the legal interpretation but has warned the Merkel Government not to circumvent the Bundestag by bypassing its legislative responsibilities as to the European Union. Never a dull moment in European politics.
***Over the weekend, German Finance Minister Schauble was quoted in a REUTERS article–“Spain on the Road to Salvation”–saying Spain was on the correct path for reviving its economy. “The fundamental figures and the intention to reduce the deficit shows that we should not exaggerate [the cost of the bailout on public accounts]. Spain is on the right path.” Herr Schauble, your fantasies are the problems of Europe. Before salvation there has to be repentance, so how high does unemployment in Spain have to go for salvation to take place?
It seems a more realistic approach would be to enact a EURO REDEMPTION FUND and get to the heart of the matter. The GERMAN WISE MEN proposed a REDEMPTION FUND AS A CONDUIT TO EUROPEAN BOND. That is far more realistic than the idea that SPAIN IS ON THE ROAD TO SALVATION.
Schauble has even more problems as 172 German economists issued a public letter criticizing the ESM agreement to which the German’s allegedly agreed. Again, Europe is so hard to understand because it is a minefield of DECEIT.
***German 2-year notes turned negative this morning, reflecting the idea that the ESM Brussels agreement is far from accepted by investors. There is a continued move into the hard EUROPEAN asset classes and a continued shunning of the debt of the peripheries. The DUTCH 2-YEAR NOTE dropped to just 5.5 basis points. There are a multitude of warning signs about the BRUSSELS AGREEMENT. The German/French 10-year spread widened back out to 110 basis points. Uncertainty reigns in a summer market with diminished liquidity.
For most of Europe’s financial policymakers IT WILL NOT BE BACK TO THE BEACH THIS SUMMER. It is time for EUROPE TO ATTEMPT TO MAKE A MAJOR STANCE TO GET AHEAD OF THE CURVE RATHER THEN CONTINUING THE GAME OF THREE CARD MONTY.