Notes From Underground: Unemployment In the U.S. Was Much Ado About Nothing

The better-than-expected NFP number–163,000 net job gains–was above the consensus of 105,000. Average hourly earnings and hours worked were weaker than projections while the over all rate went up to 8.3%, leaving all the talking heads with something to either like or dislike. In my mind it is highly doubtful that the unemployment data was responsible for the 2% increase in the S&Ps, which brings back the Spanish and Italian 2-YEAR NOTES as the key variable.

Thursday saw the GLOBAL EQUITY markets sell off following the ECB PRESS CONFERENCE, as President Draghi left the global financial audience desiring more clarity on ECB QE and BOND BUYING PROGRAMS. The EURO CURRENCY and COMMODITY MARKETS BOTH TUMBLED ON THURSDAY AFTER INITIAL RALLIES AS MARIO DRAGHI left the audience wanting an encore to the previous week’s bombastic monetary language. The outlier to Thursday’s price action was the 2-YEAR NOTES of Spain and Italy as the 2/10 curves of both markets continued their recent severe steepenings, which was indicative of Mario Draghi of having a short-term victory. As long as the short-term debt rates are dropping, the peripherals can fund themselves for the near term, thus the immediate pressure is off.

When Draghi panicked the previous week, Spanish 2-YEAR NOTES had risen to more than 7%. By Friday’s close the Spanish 2-year yield had dropped to 3.88% and the 2/10 curve steepened from 80 basis points to 295 BASIS POINTS. These movements on a long curve are indicative of the great uncertainty that continues to plague the EUROPEAN BOND MARKETS. Mario Draghi has made the short positions very nervous and so bought the ECB a little time to plot a new strategy. I would caution President Draghi not to rest and take a victory lap but pursue some immediate actions before the market regroups and attacks a WEAK POINT IN THE EURO SOVEREIGN MARKET. GERMAN, SWISS, DANISH 2-year notes are all still negative so the markets still point to something being rotten in Brussels.

Mario, it is no time for relaxation but more important to pursue your ADVERSARIES. Attacking and retreating while declaring victory is no way to run a central bank. As Draghi seeks out the heads of Spain and Italy to ask for an official bond buying bailout, it reminds one of the opening scene from Macbeth:

(As the markets are like thunder and lightning)

When shall we meet again
in thunder, lightning ,or in rain?
When the hurly burly s done,
When the battle’s lost and won
That will be ere the set of the sun
Fair is foul and foul is fair:
However through the fog and filthy air
The European cauldron boils but the MONETARY PRINCE HAS BOUGHT TIME TO BATTLE ANOTHER DAY as the forces of stability are gathering in Germany. The July 27 issue of the Bundesbank staff magazine featured an interview with Jens Weidmann and Helmut Schlesinger, former Bundesbank President, which was celebrating the 55th year of economic stability under the tutelage of the German Central Bank. The forces of opposition to any ECB bond buying program are gathering in Germany and the Bundesbank is the vehicle through which the anti-bailout forces are raising their voices.
Last week in the Financial Times, it was the well-regarded Otmar Issing and now the dual interview of Weidmann and Schlesinger is causing some politicians to challenge Merkel and Finance Minister Schaeuble. The German view from the AUSTERITY CAMP–of which the Bundesbank is the lead voice–calls for political union and fiscal policy unity before there is an EURO BOND. Fiscal sovereignty has to be relinquished. The Schaeuble view is that the ECB must act as the lender of last result even if fiscal sovereignty is not yet sacrificed. THE BUNDESBANK IS FOR A MORE GERMAN EUROPE THAN FOR A MORE EUROPEAN GERMANY (ROTTEN HEART OF EUROPE). The interviewer asks Schlesinger about political union:
Schlesinger: “The question always takes back to the start of European unification. The main objective … that there would never again be a war in Europe. The plan for a common European army was ultimately blocked by France, even though the loss of sovereignty involved would have been easy to implement. It is actually hard to envisage how a loss of monetary sovereignty could be achieved in the absence of a unified state.” Her Schlesinger further goes on to argue that the cult of stability works in Germany for it has the “FULL BACKING OF THE GENERAL PUBLIC.”
Weidmann: “If a central bank has to work against public opinion,things get difficult.” Then Weidmann goes to make the point which the FT reported —-The Bundesbank President believes, “WE ARE THE LARGEST AND MOST IMPORTANT BANK IN THE EUROSYSTEM AND WE HAVE A GREATER SAY THAN MANY OTHER CENTRAL BANKS IN THE EUROSYSTEM.” (emphasis mine). Weidmann is asked to comment on a recent headline in the Bild newspaper that the Bundesbank is softening the EURO, thus inviting inflation into Germany.
Her Weidmann maintains that the Germans do not have to accept inflation as the U.S. and the U.K. favor so as to make the peripherals more competitive. The Bundesbank brings stability the EU and “when the monetary union was established, we agreed on a legal framework which has to be respected: A single monetary policy ensures price stability and each member state is responsible for its own fiscal policy. THIS IS PRECISELY WHAT IS EXPRESSED IN THE “NO BAILOUT “CLAUSE.”
The present precipitous drop in 2-YEAR SPANISH AND ITALIAN DEBT gives Draghi some room but as the battle lines are being drawn in Germany over the ECB’s mandate, Mario Draghi had better not rest. The battle has just begun.
***There was a Bloomberg article on Friday about the possibility of the Japanese giving the BOJ the authority to purchase FOREIGN CURRENCY BONDS. In a piece by Mayumi Otsuma, it seems that the Japanese ruling party is in favor of the BOJ buying foreign securities in an effort to combat the YEN’s strength. BOJ GOVERNOR Shirakawa is purportedly opposed to the idea and favors the continued BOJ program of buying REITS and other domestic Japanese securities to keep liquidity flowing into the system. The export sector of the Japanese economy is raising its voice over the concern of the YEN hurting exports so pressure is building on the MOF (Ministry of Finance). Watch the YEN CROSSES FOR ANY HINT THAT THE BOJ WILL BEND TO THE WILL OF THE POLITICIANS.

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7 Responses to “Notes From Underground: Unemployment In the U.S. Was Much Ado About Nothing”

  1. PBL Says:

    And we all know how MacBeth ends. Ha!!

  2. Stan Says:

    I’m always left scratching my head when really smart people like Yra quote this bogus BLS fudged numbers — seasonal, non seasonal adjustments etc etc.

  3. Stan Says:

    According to the Bureau of Labor Statistics, in June 142,415,000 people had jobs in the United States. In July, that number declined to 142,220,000. That means that 195,000 fewer Americans were working in July than in June.
    But somehow that works out to “163,000 new jobs” in July. “
    Go figure.

  4. yra Says:

    Stan–we can only work with what the markets allow for.If the markets give the BLS data credibility then who am I to argue—after the initial trade action I will search thru and look for market action that says the headline data is old and the market is on to a new assessment of various global events

  5. asherz Says:

    The BLS number of 163,000 new jobs had the following adjustments.
    The BLS added 377,000 jobs as a seasonal adjustment, the highest in at least a decade. The Birth/Death adjustment was 52,000, up from 5000 last July. Ho-hum.
    Will whatever Draghi does produce anything more tham a short term effect? Will the sovereign debt problem be moving towards a solution with this latest bailout when it comes?

  6. Greg B Says:

    Sidetracking here Yra:

    How is it possible that Knight traded with flawed software for 45 minutes without someone pulling the plug? Especially on the day new software was being introduced?

    As far as implications go, is there any possibility that some sort of speed govener will be put on HFT (ie, orders must be active for at least 1 second) or is that genie too far out of the bottle?

  7. yra harris Says:

    Greg B–will think about this as I have long held views about the need for rules on HFT—but the Knight riddle I have to think and read more about.The idea of a spped governor is not new and some exchanges have variations on that theme—I have argued with many that HFT should have to keep their quotes alive for X amount of time but have lost everyone of those arguments when it mattered.But the fact the FLASH CRASH has never been fullly detailed and explained is problematic.

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