First, the unemployment report offered no surprises as the market was close to the actual release. The real surprise was in the upward revisions to the February and March numbers. The negative surprise was the average work week shrinking by 0.2% of an hour. The shorter work week may be an aberration but it may mean that employers are cutting workers hours so as to keep under the Affordable Care Act mandates, but I caution it is far too early to say that this is definitely occurring. The BOND markets reacted negatively to the “stronger” jobs data and the 10-year note future fell as yields rose by 10 basis points. Investors bought stocks and seemingly sold bonds in a performance of risk-on/risk-off. Again, one day’s action does not a trend make. The pure risk-on/risk-off paradigm has been dormant for quite a while and let’s hope it stays that way.
Posts Tagged ‘yield curve’
Notes From Underground: The Fed’s Zero Rate, Quantitative Easing Policies Are Stock Market FundamentalsMarch 10, 2013
The continued parade of stock market analysts who proclaim the equity market is rallying merely on Fed monetary policy instead of market fundamentals have spent far too much time doing case studies and not reading economic history. Interest rates as the variable signaling the cost of money are a very critical element and a key fundamental of the economy and especially the equity markets. U.S. multinational corporations are sitting on record piles of cash and also reporting strong profits. Much of the growth in profits can be attributed to two factors: Very low borrowing costs and continued pressure on wages. The FED has created the low interest rates and has hoped that the profitability resulting from low borrowing costs would bleed into higher wages and thus the need for increased hiring. The problem is many fold on the lack of success in aiding jobs creation. Globalization has kept pressure off wages and the deleveraging of the private balance sheets has meant that downward pressure remains on demand.
Friday’s unemployment report solidified the TRIFECTA of LIQUIDITY for the week. ECB President Draghi seeded the “liquidity clouds” at Thursday’s press conference by announcing the installation of the OTM (outright monetary transaction), which will allow the ECB/ESM to purchase unlimited amounts of sovereign debt of up to three-year duration–of course with conditions for those asking for help. Draghi is hoping to buy the whole EU project enough time so that a FISCAL UNION CAN BE FORMED WITH THE ABILITY FOR THE EU TO ISSUE A TRUE EUROBOND.
This morning the Bank of Canada (BOC) voted to keep rates steady as 1% as Governor Mark Carney voiced concern over the troubling situation in Europe. The BOC noted that weakness in the EUROPEAN ECONOMY could spread as more austerity is applied to the profligate peripheries. The Canadians are in a difficult situation as the growth in household debt is growing because of continued low rates and this is causing angst with economic policy makers. Finance Minister Flaherty noted that the Canadian government may have to find other ways to halt the increase in household borrowing. I am not a fan of Mr. Flaherty but it is nice to see a government actually thinking ahead of the problem and looking for ways to “LEAN AGAINST THE WIND.”
Notes From Underground: MIlton Friedman was wrong about free lunch–Ben Bernanke had it at the National Press ClubFebruary 3, 2011
Today, the main story was the address that Chairman Bernanke delivered to the National Press Club as his topic was the, “The Economic Outlook and Macroeconomic Policy.” The FED Chairman’s speech was a “redo” of Mervyn King’s speech 10 days ago. It seems that the FED is adhering to the same view as the BOE, in that the FED will stay the course on QE and its present monetary policy. Inflation is not a problem even though some highly visible price increases have taken place in some commodities but that is due to the growing demand from the emerging economies. Core inflation was “only 0.7 percent in 2010″ and wage growth is non-existent, so there is no worry on the inflation front.
It has been a great privilege to share my thoughts and market insights and allow me to occupy some of the highly prized real estate on your electronic devices. I can unequivocally say that I learn much from my readers and derive great benefit from synthesizing my thoughts and putting them into trades. The basis of NOTES is to make sense of the global political and financial fabric and then try to succeed where I believe the econometric and financial markets fail. It’s never easy to review one’s ideas and see where the failure to act has taken place.