Notes From Underground: Mario Draghi, The Most Powerful Man In Europe Since???

Tomorrow is UNEMPLOYMENT FRIDAY and the markets are geared up for headline driven action. The U.S. jobs report is expected to be 145,000 nonfarm payrolls and a rate of 8.2%, no change in the length of the work week at 34.4 hours and average hourly earnings rising 0.2%. The most significant data points will be manufacturing and construction jobs. Last month’s manufacturing jobs growth was weak and an increase is needed to put a more positive flavor to the report. I bring up construction jobs only because the HOUSING STOCK PRICES have risen dramatically and if homebuilders are increasing their work load then construction employment ought to be increasing–just looking for some synthesis between the real economy and stocks.

The Canadian Government now reports its unemployment data at the same time as the U.S. (previously an hour and half earlier) and as usual the Canadian manufacturing data is important because of its synchronization with the U.S. auto industry. Ontario is a primary market of auto parts manufacturing for U.S. auto makers. The recent data out of Canada has been strong as last month’s jobs growth was 36,000 with an unemployment rate of 7.3%. The consensus for Canada is 11,000 jobs increase. Watch the construction number in Canada for the BOC is on record of trying to slow home building so a strong overall number for the Canadians despite a loss of construction jobs would be a very positive result.

For the U.S.,any number above 100,000 should be supportive of the EQUITY markets  as there is market surety of the FED remaining accommodative regardless of how strong the data. If the number is less than 75,000 (NFP) the S&Ps could sell off as the market fears a weakening in the jobs growth and thus a slowing economy. I think the EQUITIES have rallied substantially on FED liquidity and now be at the point were very soft economic data will be viewed negatively, thus rates at a point relative to equity values that BAD IS NO LONGER GOOD.

***After I listened to the Mario Draghi press conference today, I am convinced that the ECB president has seized power from the sovereign governments of Europe. Why do I make this bold assertion? President Draghi has built the idea of BOND BUYING on the idea of the MONETARY TRANSMISSION CHANNEL. This gives the ECB the power to intervene in the money markets if it deems that interest rates are not responding as the ECB desires. If the ECB lowers rates to 0.50% and small businesses in Germany can borrow at 3.5%, while in Spain a similar credible firm pays 6.5% to its bankers then the ECB can determine that the monetary transmission channel is broken and intervene with Outright Monetary Transmission to correct the inequity.

This disruption in the financial flows system is at the discretion of the ECB and thus provides a vast amount of power in its ability to act. We know that Mr. Draghi and Mr. Schaeuble have previously determined that repairing a dysfunctional MTC is within the ECB‘s mandate as the late July actions generated by President Draghi established that there would be no TABOOS when it came to the ECB restoring proper prices in a broken credit market. The arbitrariness of this means that Draghi can buy sovereign debt even if the individual sovereign states have come to an agreement on the ultimate bailout plans.

The Bundesbank has been rendered much less powerful by the ECB president declaring the MTC broken and in need of a correction of prices. The two main issues for Draghi in deciding to use the “bazooka” are what he said was Eurozone FRAGMENTATION of borrowing rates (high differentials between bank lending rates in different states) and the slope of the yield curve. When the Italian and Spanish curves began to flatten in late July, it prompted the ECB to intervene in the TWO YEAR NOTE markets and forced Draghi to state on July 26, 2012 that the ECB would do whatever it takes to correct mispriced markets. Remember that the 2/10 curves in Spain and Italy steepened dramatically over the next two weeks, going from a mere 80 basis points to almost 300 points in steepness, relieving pressure on short-term debt.

Today’s ECB press conference today helped to codify the concept of “Whatever It Takes.” The key will be whatever President Draghi determines is a functioning monetary market. It appears that Spanish PM Rajoy has been emboldened with Frankfurt’s power grab. President Jens Weidmann, your move. And still the EURO rallied!

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6 Responses to “Notes From Underground: Mario Draghi, The Most Powerful Man In Europe Since???”

  1. Kevin Says:

    Hi Yra what struck me during Draghi’s conference was the “Conditionality Illusion”. When you consider a scenario where Spain requests a bail-out per the programme. If Spain then misses its deficit targets, what now? (as is probable given the negative feedback loops from austerity attempts during a private sector deleveraging). Would the ECB really stop buying and then start selling Spanish bonds? In that market environment? Of course they wouldn’t – that would be forcing Spain out the Euro. Eureka – “Conditionality” was created to comfort the Germans like Aslan comforts children.

  2. yra Says:

    Kevin–right on target.Conditionality was certainly a bow to the Germans—but now the Monetary Transmission Channel checks Weidmann

  3. bmcc Says:

    yra, thanks for all of the postings, very helpful in trying to sort through this endless mess. I’m a bit confused by the recent strength of the euro vs. the dollar. Is it just as simple as capital flows back into europe + bernake winning in the competitive devaluation race. doesn’t draghi ultimately want/benefit from a weaker euro?

  4. yra Says:

    bmcc–yes but also it was interesting to hear Draghi say he watches the EURO go higher as the sovereign bond market satbilizes as the market anticipates that the EURO will not fall apart.It is the exact opposite of countries like spain needs–they need a lower Euro so it is a dilemma

  5. Dustin L. Says:

    Oh the arrogance is laughable of these policy makers claiming to know the true value of everything at all times. I’d like to see them put their own money on the line in taking a position against the supposed mis-priced markets instead of hiding in the world of academia and risking OPM, or rather, in essence stealing it via their inflationary policies. All central bank balance sheets are getting loaded up with junk and confidence is well on its way to being completely lost in these institutions and with it the value of their promissory notes. Did someone say gold? 🙂

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