Notes From Underground: Central Bank Poker–After the AUSSIES CHECKED, the BOE BET; the ECB CALLED

No great surprises from the mandarins of global finance. First, the BOE announced the widely anticipated 50 BILLION QUID increase in the QE program but Mervyn King and company did not cut the overnight lending rate. Following on the heels of the BOE, the ECB, under the guidance of Mario Draghi, cut the overnight rate by 25 basis points to 0.75% and also lowered the ECB deposit rate to zero from 0.25%. Again, no surprises, although the DEPOSIT RATE CUT WAS NOT WIDELY EXPECTED. Why did Draghi move to make the deposit rate ZERO?
It seems he is trying to push the EUROPEAN BANKS away from leaving the LTRO at the ECB rather than lending them out and putting some velocity into the money supply. The problem is that the banks were already losing money on the LTRO funding as they were borrowing from the ECB at 1% and depositing some at the ECB for 0.25%, thus losing 75 basis points on money thought to be a cushion in case of increased stress.
WHILE ZERO IS A NICE HEADLINE, it will take a while to feel the real impact. All in all nothing much out of the realm of expectations except … FOR THE CHINESE.
One minute prior to the BOE announcement, a news flash appeared that the CENTRAL BANK OF CHINA cut interest rates by 31 basis points and also warned financial institutions to “CONTINUE TO SUPPRESS SPECULATIVE INVESTMENT IN HOUSING.”  The Chinese move initially sent stock markets and precious metals into rally mode, as the RISK-ON ALGO FORCED SHORT POSITIONS IN GOLD, COPPER AND OTHER METALS TO COVER. The rally was of a very short duration as it seems that the Chinese move raised concerns about the genuine health of China’s economic growth. China is burdened with a major amount of excess capital investment so any sense of nervousness on the part of the PBOC is causing angst among international investors.
Even though the BRITS AND EUROPEANS moved to cut and the U.S. data from ADP and Challenger was better than expected, the S&Ps failed to hold the early rally. (U.S. EQUITIES failed to rally late in the day as tomorrow’s UNEMPLOYMENT REPORT left investors in a very cautious mode.)  The GOLD and SILVER sold off hard following the RISK-OFF MODEL. Again, the CENTRAL BANKS ARE PLAYING A LIQUIDITY GAME AND HAVE SUCCUMBED TO BERNANKE’S MANTRA OF NO MORE 1937s. During Mario Draghi’s PRESS CONFERENCE, the ECB President was so forthright that he openly stated: “REAL RATES ARE NEGATIVE” (reported in a BLOOMBERG headline summary piece).
Yes, a central bank chief actually admitted in full view that real interest rates are negative. It is negative real rates that continue to make the BULL CASE FOR GOLD, even though the GOLD weakened in DOLLAR TERMS, it held at recent highs against the EURO. This needs watching because it has been GOLD‘s failure to rally against the EURO that has kept the bullion market under pressure.  GOLD’s performance tomorrow after the UNEMPLOYMENT NUMBER WILL BE IMPORTANT. If the U.S. data is strong the GOLD will sell off as investors will perceive another round of QE to be off the table … for now. But the real story will be GOLD against the EURO and other currencies.
Adding to the global central bank liquidity thrust, last night BOJ Governor Shirakawa informed Japanese regional bank managers that the, “BOJ continues powerful monetary easing.” Last one in the LIQUIDITY POOL HAS THE MOST OVERVALUED CURRENCY!
***After today’s move by the ECB, the ITALIAN BOND TRIED TO RALLY AGAINST THE BUND but by the end of trading the Italian 10-year yield rose 21 basis points to 5.97%; the Spanish 10-year was up 36 basis points to 6.77%; French OATS dropped 4 basis points and the German BUND FELL 7 basis points. The Irish note was flat. Following the Italian and Spanish rates, the ECB has a great deal of work ahead to lower the borrowing rates of Francois Hollande’s newest and bestest friends.
Tomorrow’s unemployment data is a two-part event. For the first time, the Canadians are releasing their unemployment report at the same time as the U.S. so we will not have a window into possible U.S. jobs, especially the manufacturing aspect. When Canada released at 6:00 a.m. CST, large manufacturing job growth in Ontario would be a possible signal for U.S. manufacturing as Ontario is heavily reliant on auto production and export to the U.S. Now that window is gone so the Canadian number will have diminished importance for traders. Thus, all of our attention will be on the U.S. JOBS–market consensus is for 115,000 NFP. The guesstimate was revised higher after today’s ADP release showed private sector job growth to be better than expected.
The JOBLESS RATE IS EXPECTED to hold at 8.2% and AVERAGE HOURLY EARNINGS TO RISE A TEPID 0.1%. The work week is also expected to hold steady at 34.4 hours, reflecting the very stagnant nature of consumer spending and income growth.
The MANUFACTURING DATA TAKES ON NEW IMPORTANCE AS THE RECENT DOLLAR STRENGTH MAY BE STARTING TO IMPACT EXPORTS. THE U.S. TREASURY HAS BEEN PUSHING THE EXPORT THEME FOR THE LAST TWO YEARS AND THERE WILL BE CONCERNS AT THE FED IF THE DOLLAR’S SECOND QUARTER STRENGTH IS CURTAILING MANUFACTURING JOB GROWTH. (THIS MAY BE THE BIGGEST STORY WITHIN THE STORY.) If the NFP is under 75,000 and manufacturing jobs decline, the BONDS and NOTES will rally and the market will be in a quandary: ECB or the FED?
***FOR CANADIAN TRADERS: The jobs growth is expected to be 7,000 with the rate remaining at 7.3%. The Canadian jobs number may be negatively impacted by the DECLINE IN ENERGY PRICES. If jobs in Canada continue to grow inspite of lower OIL prices, that would be a bullish sign but wait for the RISK-OFF ALGOS TO PROVIDE A BUYING OPPORTUNITY.

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3 Responses to “Notes From Underground: Central Bank Poker–After the AUSSIES CHECKED, the BOE BET; the ECB CALLED”

  1. jerry thoel Says:

    Very insightful …thanks much YRA.Your blog is the first thing I read every morning…..BTW…I think that ADP# is 100k to high.regards THL

  2. Danny Says:

    Hey Yra,

    Did you notice the story about the political situation in Japan and how they are running into an American-esque political fight regarding a budget plan and that if they can’t pass the bill the government will run out of cash sometime in October?

    In terms of a market view…TON’s of people talk bearish on the Yen always looking for opportunities to sell it against CAD, US, even the EURO…but I have to wonder if Japan actually takes meaningful action for fundamental reform will the Yen be a BUY? As bearish as sentiment seems to be, not too many people get bullish the yen for fundamentally favorable reasons (more of a risk-off bet) and if the fundamentals shift more positively, will that catch people off guard?

    http://www.cnbc.com/id/48089268

  3. yra Says:

    Danny–you touch on the main point over the last ten years[or more] about the problem of politics in Japan and its impact on the currency.I am not astute about the intricacies of Japanese domestic politics but from a macro view the overly strong currency is causing problems for manufacturers.If Japan makes the needed structural reforms of which you point,then Japan Inc will need a weaker YEN to kick start the whole process.EURO weakness is aiding Germany while driving its main competitor Japan to higher priced traded goods because of the YEN.

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