Notes From Underground: Friday Is the All-Important U.S. Employment Data, But Why Was European Employment Glossed Over?

The February jobs data has been compiled and is now ready for public consumption. The consensus is for 165,000 (revised upward from 160,000) nonfarm payroll jobs being added and the rate to hold steady at 7.9%. This may be a difficult number to trade because the equity markets have already sloughed off so much negative news to keep the rally  in tact–Italian elections, sequestration and economic malaise throughout Europe. The weekly jobless claims numbers have surprised on the downside during the last few weeks so a 200,000 NFP number would not be a surprise. It will be more important to watch average hourly earnings and the length of the work week–earnings are expected to be up by 0.2% per hour.

If the consumer is to strengthen spending, earnings will have to increase to give greater impetus to the recovery. December saw a large increase due to bonuses and dividends being brought forward to avoid increased taxation so a number above 0.2% will be a badly needed positive. The workweek has remained stuck at 34.5 hours, but in light of the increased medical costs on employees hours should increase before new workers are hired. The stock market has certainly enjoyed the mix of tepid growth and an accommodating FED policy but the economy is going to have to begin to strengthen so as to keep the rally in place. Yes, zero interest rate policy is certainly a powerful elixir but it can’t continue to be the sole variable. The FED has told us that rates will low but unlike Senator Schumer, I don’t think it can be the only game in town now that we are approaching all time highs in the S&P.

The Canadian employment dat will be simultaneously released with the U.S. and there is an expectation of a slight gain of 7,000 jobs after January’s 22,000 LOSS. The unemployment rate is expected to remain at 7.0% but as usual I will be watching the manufacturing jobs very carefully. The Bank of Canada has already warned of the slowing in the housing sector as banks hold back on mortgage lending. So while construction jobs should be a drag, the robust U.S. auto sector ought to help create work in the industrial base of Ontario. All in all, not very much to go on, but hey Spain has 26% unemployment and the overall European economy is more than 12% unemployed. It hasn’t affected the markets in Europe so why worry? It’s all good.

***The ECB and the BOE held steady today as predicted. The British pound initially strengthened as some analysts had forecasted an increase in the QE program but by day’s end the POUND was virtually unchanged against the U.S. dollar but weakened versus the euro. The ECB held rates as expected at 0.75% but it seems that President Draghi’s press conference was not nuanced to an easing mode so the recent EURO shorts covered their positions. After having listened to the hour-long press conference, I am impressed by how much the market moves on Mario Draghi saying NOTHING. Again, he reiterated that a RATE CUT was discussed but it gained little or no support. The ECB president let it be known that he was very satisfied:

  1. The early repayment of the Long Term Repo Operation by some banks;
  2. Receding financial market fragmentation;
  3. The narrowing of spreads between the core and the peripheral nations as international flows return to the European debt markets and thus the shrinking of risk premiums; and
  4. The Italian election was a quick blip but the markets steadied themselves and proves resilient to accepting a bad political outcome.
So all in all, Mr. Draghi can play the waiting game and hope that strengthening global demand will keep the EU from further economic decay. He did say one thing that I found of more than passing interest: HE OPENLY PROCLAIMED THAT THE EUROPEAN UNION IS NOT A TRANSFER UNION. This is great news to the Germans who shudder at bailing out every debt-constrained nation, but the French and Spanish are certainly in position to test Draghi’s proclamation. The ADVERSE FEEDBACK LOOPS caused by austerity budgets are putting great pressure on the political situations in those two countries and we are entering the spring season when demonstrators return to the street. Again, Mario, let us hope that TIME IS ON YOUR SIDE.
***Two other central banks have met or will meet this week. The Bank of Japan announced last night that it will stick to its current agenda. While the YEN was steady most of the night after the BOJ release, the strength in the EURO led to the YEN being sold and investors returning to the long side of the EUR/YEN cross as it rallied over 2% on the day.
More importantly, tomorrow at 9:00 a.m. CST the Bank of Mexico is going to announce its interest rate intentions. The present overnight rate is 4.5% and the market is looking for a cut as the inflation rate has been well contained below 3.5% for a long period of time. The MEXICAN PESO had been trading in a high correlation with the U.S. equity markets but over the last few days long positions have been liquidated in anticipation of a rate cut. Yes, my readers know I have made a BULLISH case for Mexico for two years and now many investors have also found their way to the best economy in the West as growth is picking up.
The new Mexican President Enrique Nieto is rapidly moving to implement much-needed reforms in the energy sector. The Mexican Parliament is seriously entertaining opening up the energy sector to foreign investment. The Constitution of 1938 forbid FDI in the energy sector, but PEMEX has the need for funds to replace depleting oil fields. Because the Mexican Federal Budget is heavily dependent on Pemex revenues, there is not enough capital to put into the newest technology.
The need for foreign direct investment, a growing population, an attractively  priced labor force, close proximity to the U.S. and all of NAFTA, robust Latin American markets and an undervalued currency … the case grows by the day. Yes, many investors are long but if the U.S. equity markets are rising based on improving fundamentals than Mexico is certainly an attractive locale. If the Bank of Mexico cuts it overnight rate, get your technicals ready and look for a low-risk place to get long the peso–maybe long the peso short the SPOOS … if value is there–just looking at possibilities for a real growth story. Now if we could end the corruption…

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5 Responses to “Notes From Underground: Friday Is the All-Important U.S. Employment Data, But Why Was European Employment Glossed Over?”

  1. arthur Says:

    Yra: Do you still think that the situation in Spain is much worse than in Italy?

  2. yra harris Says:


  3. Mr Mittens Says:

    Nice call re MXN being a buy on weakness post cut – but do you really think the MXN can break its correlation with the S&P? And if so, what do you think the MXN can strengthen on as the S&P is dropping – what correlation would you look for then? I would think it could only work in reverse, i.e. MXN to weaken as S&P remains bid – as we saw earlier this week and recently with the CAD.

  4. Breakfast Links - Points and Figures | Points and Figures Says:

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  5. yra harris Says:

    Mittens—yes the correlation isimportant but if the U.S. is to be a “beacon” of growth for the rest of the developed world the peso will get a very important leg of support.But with a 4% interest rate and 3.8% GDP growth and growing more competitive with China ,Mexico has much to like.Again,I think watching the Sam Zell owned company of HOMEX–the homebuilder of middle calss Mexican homes will be important–the stock dropped after the rate cut after a sizable rally on Thursday–but it has had a weak performance to date.The Peso though is at 12.7 to the Dollar which on a relative basis is very cheap.My case for the relative value will be made again in tonight’s blog or tomorrow’s

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