Notes From Underground: The ECB and BOE Meet Tomorrow and the Market Expects No Change

The market’s attention turns to the ECB and BOE rate decisions. Any rate change would be a surprise as the U.K.‘s data has been weak of late as the austerity budget is beginning to be a drag on the British economy. The policy makers in England are content to let rates stay on hold as it helps to weaken the POUND against the EURO. It will be more interesting to hear from the ECB through Trichet to see if the Europeans are content with the present inflation situation, especially as the EURO has made new highs for the last 18 months. The recent strength of the EURO is a problem for the debt-stressed countries and with the U.S. on hold for an “extended period” any move by the ECB would put more upward pressure on the EURO currency. Let’s see if Trichet surprises us by discussing the recent strength of the EURO. The post-meeting press conference will be waiting to hear if Trichet loses the vigilant language.

Friday, of course, will bring the report on the EMPLOYMENT SITUATION in America and Canada. Canadian unemployment comes first at 6:00 a.m. CST and consensus is looking for job growth of 15,000 and the rate to stay at 7.7%. Last month’s employment data disappointed as Canada lost 1,500 jobs. The status of manufacturing jobs in Ontario will be most important as it reflects upon the auto sector in the U.S. Ninety minutes later we will hear from the U.S. Bureau of Labor Statistics. The U.S. employment report is expected to be nonfarm payroll growth of 200,000, a rate of 8.8%, unchanged, and an average hourly earnings increase of 0.2%.

Today’s ADP private sector jobs data was a little softer than expected but it seems that the 200,000 NFP is still reachable, especially as IT SEEMS THAT SMALL AND MEDIUM FIRMS ARE STARTING TO HIRE. The fact that the NOTES AND BONDS have rallied recently–and confounding the EXPERTS–a 250,000+ number with a lower jobless rate should create an immediate selloff. The recent rally in the NOTES has seen the 2/10 curve flatten about 8 basis points to 265, so I think a strong number would lead to more flattening. I’m watching support levels on the 10s for a possible opportunity, for in my mind the 2-YEAR NOTES are far more overvalued. Speaking of ridiculous BOND valuations, it is important to read BILL GROSS‘s recent comment about BOND VALUATIONS. It is important to remind the PIMCO chieftain that timing is everything, which is why we rely on charts as much as fundamental analysis.

In an interesting piece today, the Mexican Central Bank reported that it purchased almost a 100 TONS OF GOLD in February and March in order to diversify away from the DOLLAR. It is of increasing importance that a central bank hold some assets not based in fiat currency as many emerging economies are beginning to believe that the global financial system is a bad poker game with the dealer playing with a fixed deck. It seems that, like any good poker player, the Mexicans are joining other nations and not wanting to be the “CHUMP” at the global poker game. The Mexican announcement could not lift the metals markets–old news of course–as GOLD and SILVER came under heavy selling as the popular press was reporting that the Palindrome (SOROS) was liquidating some of his GOLD and SILVER positions.

I can’t verify this but if there is truth to it I think it is time to pay close attention to the GOLD/CURRENCY spreads or crosses. If GOLD is to come under pressure, it will be versus some of the more desired currencies, especially those that have a POSITIVE REAL RATE OF RETURN. The GOLD/AUSSIE cross should become very significant as a barometer of market sentiment, but all the GOLD/CURRENCY relationships will possibly become directional for GOLD.

The most ridiculous opinion piece I have read in a great while: Alan Beattie’s piece in tomorrow’s FT titled, BRITAIN Was Right To Sell Off Its Pile Of Gold.” Now, it is important to note that Gordon Brown, the Chancellor of the Exchequer, sold most of the U.K.’s GOLD HORDE at around $290 an ounce–just prior to the start of the 10-year GOLD rally. Beattie defends Brown by saying the U.K. Treasury is not a sovereign wealth fund and therefore has no profit motive. Also, Britain does not run a large trade/or current account surplus and is therefore not burdened with an excess reserve problem having to invest its proceeds. He goes on to compare Brown’s move to France selling Louisiana to the U.S. If you need the funds you have to sell assets and can’t look back at what might have been.

Mr.Beattie, the fact that the chancellor had to sell off a long-held asset for a short-term budget boost meant that the government, as usual, was living beyond its means. It seems that Mr. Beattie is very casual with the public treasury as the difference between the received price and today’s value would be $16 BILLION, a trifling amount he points out for it would only cover about three weeks of this year’s deficit. THAT HUGE DEFICIT IS WHY THE TREASURY SHOULD HAVE HELD ITS SOLE ASSET THAT COULD NOT BE FRITTERED AWAY BY ITS OWN PRINTING PRESS. It seems that the BRITS are suffering from MONTEZUMA’S REVENGE.

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3 Responses to “Notes From Underground: The ECB and BOE Meet Tomorrow and the Market Expects No Change”

  1. PBL Says:

    Yra,
    I guess Billy boy Gross misses Gilligan and his rabbit. As McCulley was the Keynesian nut in the operation So I will do it for him. BIll, markets can remain irrational longer than u hold on even with 1 month lagging redemptions!”

  2. Danny Says:

    Yra,

    I do not recall if I read this on your blog or somewhere else…but someone at one point was talking about the potential for some under the table discussions on the part of the White House with NYMEX about potentially raising the margin requirements on energy products.

    I have been racking my brain with curiousity about the impact of leverage and margin requirements on overall price. In the housing market it seems clear that in normal market conditions lowering the cost of leverage (i.e. the mortgage rate) as well as decreasing the required down payment, leads to higher home prices and vice versa.

    Perhaps it is just a strange coincidence but the metals market seems to have turned almost exactly when the CME raised the margin requirements on silver.

    This has me wondering if margin requirements really do impact price…and why? It doesn’t seem clear to me that, in a market where there has to be a short for every long, leverage/margin requirements has to manifest itself into higher prices?

    Yet, I am finding the idea that if NYMEX jacked margin requirements on energy products pretty dramatically…it could very well lead to a sharp fall off of prices?

    Any thoughts or feedback?

    Danny

  3. yra Says:

    Danny–alot to think about.Define dramatically.Second ,we need to really understand the role of ETF’s and the fact they are margined differently may help resolve the riddle you pose???

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