Notes From Underground

Yes, the ECB raised rates today and Trichet failed to listen to the wisdom offered by NOTES FROM UNDERGROUND. That means I have overestimated the wisdom of Trichet while underestimating the size of his ego. The rate rise to 1.5% was widely anticipated so the EURO was immediately sold but regained some strength after the ECB announced that it was WAVING THE MINIMUM CREDIT RATING FOR PORTUGUESE BONDS USED AS COLLATERAL FOR REPOS. As the ECB raises rates, it allows for weak collateral to be utilized thus allowing for a large liquidity infusion. This is a fine example of Dostoyevsky’s Grand Inquisitor as bread is taken from the people with one hand and returned to them with the other and the people believe it is a miracle. Europe has become a “ball of confusion.” Why raise rates when you are simultaneously lowering credit standards to prevent a sovereign default?

The actions by Trichet are inane. Today’s inconsistencies can only be measured in a comparison to the U.S. during September and October 2008. It would be like the FED raising rates on the day that Congress approved TARP. Again, the markets applauded the backdoor easing by the ECB and the EURO rallied especially against the haven currencies, YEN and SWISS. The Bank of England held rates at 0.50% and left the QE program at 200 billion pounds, seemingly content that the weakness in the POUND was aiding a very fragile economy.

At 6:00 a.m. CST, the Canadians will release its unemployment report. This number is a window into the U.S. release so I pay close attention, especially to the manufacturing jobs. The softness in the U.S. economy and the Canadian economy has been blamed on the supply disruptions from JAPAN. If manufacturing jobs are up in Canada it may be a result of AUTOMOBILE PRODUCTION RAMPING BACK UP IN ONTARIO. If the effects of the tsunami are receding, it may be indicative of stronger job growth in the U.S. The Canadian job consensus is for an increase of 13,000 positions and for the rate to remain steady at 7.4%.

An hour and a half later, the U.S. releases its data and the market estimate is for 110,000 NONFARM PAYROLL,the rate steady at 9.1% and AVERAGE HOURLY EARNINGS increasing by 0.2%. The ADP data was released today and came in far above consensus–157,000 versus a predicted 70,000. ADP‘s upside surprise has caused Wall Street economists to begin revamping their guesstimates so at this time it appears that the new whisper numbers are approaching 175,000.

If the jobs data is stronger than expected, the yield curve OUGHT to steepen as the FED is on hold for an extended period while QE2 has expired so the market can sell the long end. Again, I stress that if the economy strengthens the 2/10 curve will make new highs in the near-term as the FED waits for confirmation of sustained jobs growth. If the jobs number is weaker than anticipated, it will be significant where the rally stops so be prepared with your resistance levels.

The EQUITY RALLY has led a softening in the BOND AND NOTE FUTURES, making the long end of the curve vulnerable to a sell-off, especially with the BUDGET CIRCUS in WASHINGTON, D.C. If there is some resolution on the BUDGET, it will probably create a rally in the BONDS but nothing that should be sustained until the market gets clarification as to what has been compromised.

A big story from my perspective, was the news out of the White House that a compromise has been reached with Mexico over a long-time contentious issue. Since the inception of NAFTA on January 1, 1994, the U.S. has blocked Mexican truck drivers from carrying loads from Mexico onto U.S. roads. The goods produced south of the border had to be reloaded onto U.S. trucks at an increased expense. The Clinton administration blocked Mexican trucks over an issue of safety and the Bush administration, not wishing to upset the truckers union, maintained the policy. The Mexican authorities believed that the U.S. political motives were a violation of NAFTA and slapped $2 billion of duties on U.S. goods in retaliation. Now it seems the union-friendly Obama administration is willing to capitulate on the issue and I am wondering why.

There has been a great deal of complaining from U.S. corporations about the difficulties in China, especially over intellectual property issues and now rising wages. Many U.S. multinationals were going to be manufacturing in Mexico along the border. These factories are referred to as MAQUILADORAS. Prior to the advent of NAFTA, the MAQUILS were built to take advantage of cheap labor and a vast new free trade area. The multinationals plans were sidetracked by the cheap labor pool in China, aided by a 50% devaluation of the CHINESE YUAN on JANUARY 1, 1994. An amazing coincidence, dare I suggest?

The CHINESE CURRENCY WENT FROM 5.8 YUAN TO THE DOLLAR TO 8.7 YUAN TO THE DOLLAR … OVERNIGHT. The Mexican peso at the same date was 3.11 PESOS to the DOLLAR. Mexico never got its manufacturing going and by December 1995 the Mexican economy was on the verge of a credit crisis and had to be bailed out by the U.S. Treasury. Today Mexico is fairly healthy, although beset by DRUG PROBLEMS, but the labor force is still a source of low wages and the Mexican Peso is currently 11.53 to the DOLLAR. It may be an illusion on my part, but with all the discontent over China and the threat of tariffs, Mexico may be a compelling story. Pay attention and put the PESO on your radar screens. UNTIL THEN KEEP ON TRUCKIN’.

Tags: BOE, bonds, Canada, China, Chinese Yuan, Dollar, ECB, Euro, Fed, Japan, Mexico, NAFTA, Nonfarm Payroll, Peso, Portuguese debt, Pound, QE, swiss, TARP, Trichet, unemployment, Yen

This entry was posted on July 7, 2011 at 7:34 pm and is filed under ECB, Europe, UK, United States. 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.