Notes From Underground

Yes, the U.S. and Canadian unemployment data were well below market expectations. Nonfarm payrolls in the U.S. were half of the consensus number and under the 110,000 NFP that we wanted to see so as to test the resolve of the recent equity market rally. Not only were the jobs created numbers weak–manufacturing actually lost jobs–but the important average hourly earnings were flat (0.2% increase expected) so there is no growth in consumer spending potential. As poor as the data release was, by day’s end the SPOO and DOW rallied well off the lows made early in the day. The impact from poor economic fundamentals was not strong enough to overcome the continued release of central bank liquidity into the global economy.

The Canadian employment data was also a disappointment as more than 50,000 full-time jobs were lost when the market had been expecting a slight increase. The poor Canadian data was a total reversal of the previous month’s surprising strong growth numbers and thus we caution that one month a trend doth not make, especially as the later-morning release of the Canadian PMI Ivey report was much stronger than anticipated. With no convincing picture of stronger economic activity it is important to analyze the full impact from the Japanese decision to dynamically increase its monetary stimulus program.

***BACK To the front on the Japanese declaration of war on the European Central Bank. The G-7 has maintained that domestic policy objectives of quantitative easing are a net positive for the world, the only problem is if a central bank ramps up it quantitative easing by PURCHASING BONDS AND ASSETS OF OTHER COUNTRIES. THIS WOULD BE A POLICY THAT WOULD CROSS THE LINES OF ACCEPTABLE. This is also the stance taken by Chairman Bernanke in his speech that I have previously cited, given in London on March 25, 2013. Bernanke said: “Again, the distinction between monetary policies aimed at domestic objectives and trade-diverting exchange rate devaluations or other protectionist measures is critical.” It seems that the new Japanese policy obscures those distinctions. How?

This is the critical point that must be understood for the impact of the BOJ‘s recent decision. THE RAMPING UP OF THE BOJ BOND BUYING, ITS EFFORTS TO RAPIDLY INCREASE MONEY SUPPLY, AND THE DESIRE TO CREATE 2% INFLATION MEANS THAT JAPANESE INVESTORS AND LARGE INSTITUTIONS WOULD BE CRAZY NOT TO UNLOAD THEIR MASSIVE HOLDINGS OF LONG-TERM BONDS TO THE MOST READY BUYER … THE BOJ. By unloading bonds to the BOJ the Japanese investor will be forced to either by the Nikkei or search for higher yielding bonds in foreign destinations. Yes, the BOJ will not directly be purchasing foreign assets in contravention of the G-7 agreement but its policy of FINANCIAL REPRESSION of Japanese citizens will force insurance companies and private citizens to undertake such purchases.

The action in the European debt markets on Thursday and Friday was certainly evidence of the impact of BOJ policy. The yields on 10-year notes all across Europe is indicative of the search for yield. French bond rates have fallen 25 BASIS POINTS since the Japanese announcement, as have the bonds of Belgium, Austria,Italy and Ireland. It will be difficult to comfortably short the debt of any highly rated sovereign now that the Japanese private investor is on the search for higher yielding instruments to replace long-held JGBs. The average Japanese investor could comfortably own domestic bonds at very low yields as long as prices remained steady or were in a deflationary mode. The BOJ just ended the security of that investment strategy. In a globalized world of FREE CAPITAL FLOWS IT IS DIFFICULT TO HALT POLICY OUTCOMES AT THE BORDER.

As my readers as well aware, bond rates and yield curves are very important indicators for understanding all aspects of foreign currencies, commodities and all financial assets … now even more so. And a word of caution to ECB President Mario Draghi: The German elections cannot come soon enough. If Europe holds firm to its present policy, it will be the recipient of major capital inflows and the euro may be driven much higher on a relative basis, unless there is a major political debacle. As Kuroda was heard singing :

We didn’t start the fire

It was always burning

Since the world’s been turning

We didn’t start the fire

No we didn’t light it

But we tried to fight it.

Tags: Abe, BOJ, Canada employment, ECB, Equities, G-7, Kuroda, U.S. nonfarm payrolls

This entry was posted on April 7, 2013 at 3:58 pm and is filed under BoJ, Debt Market, ECB, Japan, unemployment. 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.