The unemployment data from the U.S. and Canada were very much on target. After last month’s robust employment data, there was a small decrease in Canadian jobs and nothing outstanding in terms of manufacturing hiring so nothing to see north of the border. The U.S. nonfarm payrolls were slightly higher than expected but the average hourly earnings, which were more powerful, rose 0.4% (or 10 cents an hour). Increased wages are needed to sustain consumer demand so this was a positive factor in the data. Also, the April and May NFPs were both revised higher, making the markets believe that a September tapering of asset purchases is on the schedule. The U.S. BOND MARKETS were sold aggressively, sending yields on the long-end of the curve soaring.
The positive data from the U.S. also caused a reversal of Friday’s rally in the European bond markets. German bunds were sold in sympathy with U.S. Treasuries even though factory orders in Germany were much weaker than expected. The Europeans want to separate from any synergy with the U.S. but as yesterday’s market action revealed, the correlation-seeking algos will make this more difficult than mere rhetoric. The U.S. DOLLAR performed as expected as strong data gave an impetus to U.S. assets versus the languishing economic data from Europe. The German DAX (equity index) closed lower on the week even with the new rhetoric from ECB President Draghi. Friday’s DAX settlement in the September futures was below the LOW made on Thursday. Germany has been the locomotive of Europe but if the engine is weakening the European situation will deteriorate … quickly.
I have long maintained that Mario Draghi has been the FOX in the tale of central bankers, for while Bernanke and Mervyn King (BOE) have been aggressive in quantitative easing, President Draghi has bought a sense of calm with mere words: “WE WILL DO EVERYTHING TO PRESERVE THE EU,” and, if necessary, will invoke QE with our Outright Monetary Transactions (OMT), which not one EURO was ever provided. At the June ECB press conference, Mr. Draghi proclaimed the ECB to be the most conservative of all the central banks. If a change in the world’s perceptions is upon us, the ECB will become an aggressive participant in providing of massive amounts of LIQUIDITY, even as the FED tapers. It is time to pay close attention to the GOLD/EURO cross as an indicator of global finance becoming concerned about the European economy and the credibility of the ECB.
I have continuously opined that GOLD is not an INFLATIONARY BAROMETER but rather a store of value in a time when investors fear the onset of a deflationary spiral and how a central bank will REACT. The Japanese did not move to liquefy and debase so the YEN and BOJ maintained credibility. The initial fears in the world were that the U.S. Treasury and FED would not be able to right the economy through their UNCONVENTIONAL POLICIES, but for the last 18 months the fear of spiralling deflation and possible currency debasement has subsided in the U.S. Japan has entered the fray with their recent efforts at quantitative easing, though now it appears to be the Europeans’ problem, hence President Draghi’s turn at the July 4 media inquisition.
The movement in U.S. rates in response to the removal of “tapering” language has not only caused instability in European and emerging debt markets, but is sending the U.S. yield curve to a quick steepening. The short-end of the curve, the TWO YEAR, is held in place by continued FED rhetoric that “tapering is not tightening” and if QE ends it doesn’t mean that the FED will raise the FUNDS RATE. The problem in the massive steepening that has taken place is that it leads to higher mortgage rates, which will dampen housing demand as fewer potential buyers will pay higher home prices and higher interest rates. Some pundits are suggesting that potential buyers take out ADJUSTABLE RATE MORTGAGES but in a new regulatory environment ARMS are going to be a much more difficult proposal. Credit standards are elevated and the ability for the big WALL STREET BANKS to package the garbage into new types of ASSET-BACKED SECURITIES (ABS) is not going to be easy to sell to an investment crowd still in pain from the previous credit crisis.
So while the “BEN STEIN” efforts at curtailing some of the massive credit risks created while the FED was gunning the monetary engine have recently been successful. “BEN STEIN” are cautious that the speed of risk removal is too fast and may upset a still fragile domestic and global economy. If I am correct, then the 5/30s chart may provide some opportunity to make money playing farther out on the U.S. yield curve. If the rise of ARMs in the mortgage market doesn’t take hold and the FED worries about the housing market, it will be the MBS and the long-end of the Treasury curve that is the recipient of FED designs. It’s too early to tell, but as always do the technicals and see if there is development. The 30-YEAR BOND has risen dramatically as many of the ETFs and other leveraged vehicles have dumped assets as prices have dropped on the notion of a FED tapering. But the question arises: Is there not some REAL YIELD IN A BOND YIELDING 3.8% in a 1.6% inflation environment?
***China PMI is to be manipulated AGAIN as the Chinese leadership is unhappy with the skew from attempting to input a huge amount of data from so many sources. As my favorite sweatshirt says: “When in doubt, manipulate the data.” For years I have written that the data releases from China are unreliable, but my premise has been that if Google is not allowed freedom of operation then I can never rely on the information that is released.