Tomorrow is UNEMPLOYMENT FRIDAY and the markets are geared up for headline driven action. The U.S. jobs report is expected to be 145,000 nonfarm payrolls and a rate of 8.2%, no change in the length of the work week at 34.4 hours and average hourly earnings rising 0.2%. The most significant data points will be manufacturing and construction jobs. Last month’s manufacturing jobs growth was weak and an increase is needed to put a more positive flavor to the report. I bring up construction jobs only because the HOUSING STOCK PRICES have risen dramatically and if homebuilders are increasing their work load then construction employment ought to be increasing–just looking for some synthesis between the real economy and stocks.
The Canadian Government now reports its unemployment data at the same time as the U.S. (previously an hour and half earlier) and as usual the Canadian manufacturing data is important because of its synchronization with the U.S. auto industry. Ontario is a primary market of auto parts manufacturing for U.S. auto makers. The recent data out of Canada has been strong as last month’s jobs growth was 36,000 with an unemployment rate of 7.3%. The consensus for Canada is 11,000 jobs increase. Watch the construction number in Canada for the BOC is on record of trying to slow home building so a strong overall number for the Canadians despite a loss of construction jobs would be a very positive result.
For the U.S.,any number above 100,000 should be supportive of the EQUITY markets as there is market surety of the FED remaining accommodative regardless of how strong the data. If the number is less than 75,000 (NFP) the S&Ps could sell off as the market fears a weakening in the jobs growth and thus a slowing economy. I think the EQUITIES have rallied substantially on FED liquidity and now be at the point were very soft economic data will be viewed negatively, thus rates at a point relative to equity values that BAD IS NO LONGER GOOD.
***After I listened to the Mario Draghi press conference today, I am convinced that the ECB president has seized power from the sovereign governments of Europe. Why do I make this bold assertion? President Draghi has built the idea of BOND BUYING on the idea of the MONETARY TRANSMISSION CHANNEL. This gives the ECB the power to intervene in the money markets if it deems that interest rates are not responding as the ECB desires. If the ECB lowers rates to 0.50% and small businesses in Germany can borrow at 3.5%, while in Spain a similar credible firm pays 6.5% to its bankers then the ECB can determine that the monetary transmission channel is broken and intervene with Outright Monetary Transmission to correct the inequity.
This disruption in the financial flows system is at the discretion of the ECB and thus provides a vast amount of power in its ability to act. We know that Mr. Draghi and Mr. Schaeuble have previously determined that repairing a dysfunctional MTC is within the ECB‘s mandate as the late July actions generated by President Draghi established that there would be no TABOOS when it came to the ECB restoring proper prices in a broken credit market. The arbitrariness of this means that Draghi can buy sovereign debt even if the individual sovereign states have come to an agreement on the ultimate bailout plans.
The Bundesbank has been rendered much less powerful by the ECB president declaring the MTC broken and in need of a correction of prices. The two main issues for Draghi in deciding to use the “bazooka” are what he said was Eurozone FRAGMENTATION of borrowing rates (high differentials between bank lending rates in different states) and the slope of the yield curve. When the Italian and Spanish curves began to flatten in late July, it prompted the ECB to intervene in the TWO YEAR NOTE markets and forced Draghi to state on July 26, 2012 that the ECB would do whatever it takes to correct mispriced markets. Remember that the 2/10 curves in Spain and Italy steepened dramatically over the next two weeks, going from a mere 80 basis points to almost 300 points in steepness, relieving pressure on short-term debt.
Today’s ECB press conference today helped to codify the concept of “Whatever It Takes.” The key will be whatever President Draghi determines is a functioning monetary market. It appears that Spanish PM Rajoy has been emboldened with Frankfurt’s power grab. President Jens Weidmann, your move. And still the EURO rallied!