Notes From Underground

The ECB and BOE stayed the course on interest rates. In his press conference, Trichet discussed the ECB’s return to variable 90-day rates, which the market initially intrepreted as a possible tightening. But by the end of the trading session, the market had realized it was nothing more than the EBC attemting to return to a sense of monetary normalcy.

The September Euribor had broken about 6 basis points but wound up closing unchanged. The U.S. DOLLAR rallied today, as the 2/10 yield curves flattened on news that Fannie and Freedie were to stop lending to foreign banks in the overnight market and would begin depositing their short-term cash hoard at the FED so as to earn reserve rates. We will follow this story as it continues to unfold, but we initially see it as a further attempt by the FED to get some control of the huge amount of liquidity in the overnight markets. This represents one more arrow in their quiver and lets the market know that they are incorporating various tools in their efforts to rein in the vast amounts of short-term funds.

In the European debt markets, the new Greek bond offering drew strong demand. But after the previous two-day rally in the Greek bonds, the debt market actually closed 10 basis points higher. However, the German/Greek 10-years remains under 300 basis points. Greek officials are trying to force the European politicos to openly support the Greek administration’s budgetary actions so as to put an end to the upward pressure on bond rates.

The concept of a negative feedback loop–higher interest rates beget abudgetary stress–is beginning to sink in on the Greek finance ministry and they are trying to reverse its action. They have gone so far as to threaten to bring the IMF into the game, driving Sarkozy crazy. The Greek officials are aware that the French President does not want Dominique Strauss Kahn anywhere near the resolution of the euro crisis. Oh the price that is paid for ego and fear. Hubris anyone?

Tomorrow morning we get the U.S. unemployment report. There is a great deal of uncertainty in this report as Larry Summers suggested in an interview that the winter storms that ravage the Boston/Washington corridor, and a good part of the rest of the country in February, would wreak havoc with the jobs data. The market has reached a consensus of a -75,000 non farm payroll number, a 0.1% increase in average hourly earnings and 9.8% rate, up from last month’s 9.7%. It will take awhile to sift through the data, so be patient and be careful about being a first reactor to initial data.

Some of the cynical analysts believe that Summers was setting the market up by opining how bad the weather effect could be, thus a flat number on NFP would be deemed as fantastic. The administration would be ecstatic with a headline of job growth so the politics of health care would be removed from the front pages. Whatever: Remember that this is an election year and the longer the unemployment rate resides north of 8%, the more pressure there will be on the FED to be easy and for fiscal policy to be stimulative. Credit crises do not recede so quickly, regardless of what the sell side of the punditry advises. The power of stimulus from monetary and fiscal policy can power the equity market once the fundamentals begin to stabilize. We will get a good test of this tomorrow.

Tags: BOE, Dollar, ECB, Fed

This entry was posted on March 4, 2010 at 10:25 pm and is filed under Debt Market. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.