The better-than-expected NFP number–163,000 net job gains–was above the consensus of 105,000. Average hourly earnings and hours worked were weaker than projections while the over all rate went up to 8.3%, leaving all the talking heads with something to either like or dislike. In my mind it is highly doubtful that the unemployment data was responsible for the 2% increase in the S&Ps, which brings back the Spanish and Italian 2-YEAR NOTES as the key variable.
Thursday saw the GLOBAL EQUITY markets sell off following the ECB PRESS CONFERENCE, as President Draghi left the global financial audience desiring more clarity on ECB QE and BOND BUYING PROGRAMS. The EURO CURRENCY and COMMODITY MARKETS BOTH TUMBLED ON THURSDAY AFTER INITIAL RALLIES AS MARIO DRAGHI left the audience wanting an encore to the previous week’s bombastic monetary language. The outlier to Thursday’s price action was the 2-YEAR NOTES of Spain and Italy as the 2/10 curves of both markets continued their recent severe steepenings, which was indicative of Mario Draghi of having a short-term victory. As long as the short-term debt rates are dropping, the peripherals can fund themselves for the near term, thus the immediate pressure is off.
When Draghi panicked the previous week, Spanish 2-YEAR NOTES had risen to more than 7%. By Friday’s close the Spanish 2-year yield had dropped to 3.88% and the 2/10 curve steepened from 80 basis points to 295 BASIS POINTS. These movements on a long curve are indicative of the great uncertainty that continues to plague the EUROPEAN BOND MARKETS. Mario Draghi has made the short positions very nervous and so bought the ECB a little time to plot a new strategy. I would caution President Draghi not to rest and take a victory lap but pursue some immediate actions before the market regroups and attacks a WEAK POINT IN THE EURO SOVEREIGN MARKET. GERMAN, SWISS, DANISH 2-year notes are all still negative so the markets still point to something being rotten in Brussels.
Mario, it is no time for relaxation but more important to pursue your ADVERSARIES. Attacking and retreating while declaring victory is no way to run a central bank. As Draghi seeks out the heads of Spain and Italy to ask for an official bond buying bailout, it reminds one of the opening scene from Macbeth:
(As the markets are like thunder and lightning)When shall we meet againin thunder, lightning ,or in rain?When the hurly burly s done,When the battle’s lost and wonThat will be ere the set of the sunFair is foul and foul is fair:However through the fog and filthy air
Schlesinger: “The question always takes back to the start of European unification. The main objective … that there would never again be a war in Europe. The plan for a common European army was ultimately blocked by France, even though the loss of sovereignty involved would have been easy to implement. It is actually hard to envisage how a loss of monetary sovereignty could be achieved in the absence of a unified state.” Her Schlesinger further goes on to argue that the cult of stability works in Germany for it has the “FULL BACKING OF THE GENERAL PUBLIC.”
Weidmann: “If a central bank has to work against public opinion,things get difficult.” Then Weidmann goes to make the point which the FT reported —-The Bundesbank President believes, “WE ARE THE LARGEST AND MOST IMPORTANT BANK IN THE EUROSYSTEM AND WE HAVE A GREATER SAY THAN MANY OTHER CENTRAL BANKS IN THE EUROSYSTEM.” (emphasis mine). Weidmann is asked to comment on a recent headline in the Bild newspaper that the Bundesbank is softening the EURO, thus inviting inflation into Germany.