Notes From Underground: Are the French Kicking the Hornet’s Nest?

First, the unemployment report offered no surprises as the market was close to the actual release. The real surprise was in the upward revisions to the February and March numbers. The negative surprise was the average work week shrinking by 0.2% of an hour. The shorter work week may be an aberration but it may mean that employers are cutting workers hours so as to keep under the Affordable Care Act mandates, but I caution it is far too early to say that this is definitely occurring. The BOND markets reacted negatively to the “stronger” jobs data and the 10-year note future fell as yields rose by 10 basis points. Investors bought stocks and seemingly sold bonds in a performance of risk-on/risk-off. Again, one day’s action does not a trend make. The pure risk-on/risk-off paradigm has been dormant for quite a while and let’s hope it stays that way.

Notes From Underground has never wavered in its view that the strong equity markets are engineered on investors need to find yield and that high-quality, dividend paying stocks have become the desired repository. Negative real interest rates are a great motivator for those in need of cash flow. This has been the theme for the last 30 months and until the YIELD CURVES SUGGEST OTHERWISE, GAME ON. Yes, there will be corrections but if DEBT MARKET PROFILES REMAIN IN TACT, equity markets will find support. The tests to equity strength will come on weak data. A jobs report that misses badly by being weaker than expected will provide the test of equity market resilience. Strength will beget strength until central banks get nervous and stop the monthly debt purchases.

French Finance Minister Pierre Moscovici was busy over the weekend proclaiming the “END OF THE DOGMA OF AUSTERITY.” It seems the French have felt vindicated by Germany’s recent decision to allow Spain and France some wiggle room on meeting the Maastricht Budget numbers of a three percent deficit. The French believe that German FM Schaeuble has acquiesced to a two-year grace period but some Germans are saying that is dependent on France undertaking structural reforms. The problem for debt plagued economies of Europe is the meaning of structural reforms. If the Germans are going to require the French to undertake the type of reforms initiated by former Chancellor Schroeder, there is no way that  Socialist President Hollande can get the type of labor capitulation. This is why it is important to stay focused on the political situation as well as being attuned to the financial data. If President Hollande demands too much give back from labor then it will not be long before the government falls. In addition, the French claims of victory will make Chancellor Merkel’s upcoming election more difficult by rallying the anti-Euro forces in Germany.

The weekend Telegraph had a piece by Ambrose Evans-Pritchard, “German Euro Founder Calls For Catastrophic Currency to be Broken Up.” This is a misnomer because the man, Oskar Lafontaine is certainly not the German euro founder. A promoter yes, founder no. Mr. Lafontaine was the first finance minister for Chancellor Schroeder and resigned after a year in his position. While Mr. Lafontaine is certainly a far leftist his voice shows potential difficulty of the upcoming German election. In the Pritchard piece, Lafontaine says he “hopes that the creation of the euro would force rational economic behaviour on all sides were in vain …. adding that the policy of forcing Spain, Portugal and Greece to carry out internal devaluations was a ‘catastrophe.'” He no longer believes the EMU to be sustainable. The political rhetoric will not take a holiday this summer. Tomorrow French National Bank head Noyer meets with Bundesbank chief Jens Weidmann along with the German and French Finance Ministers. The sting of an angered hornet … Merkel may be for turning but the Bundesbank is a far different story.

The IMF added its voice to the “end austerity now” crowd. In referencing what Greece was failing to do, Reuters reported that the IMF told Greek officials that they “need to avoid across-the-board budget cuts that disproportionately hurt pensioners and employees as it moves into the next phase of its bailout…” Further, IMF staff  maintained that “insufficient structural reforms have meant that the adjustment has been primarily through recessionary channels, with UNEQUAL [emphasis mine] distribution of the burden of adjustment.”

Yes, you idiots. If the EURO cannot depreciate in value because of the natural of the entire EU system, then the burden falls on jobs and wages or what is antiseptically referred to in economic terms as INTERNAL DEVALUATION (wages are lowered through increased unemployment). The key to a structural adjustment is a much weaker currency to lessen the pain, but the euro still holds. Hey Mario Draghi, how about those negative rates to help lower the euro?

***Tonight the Reserve Bank of Australia announces its interest rate intentions at 11:30 p.m. CST. According to a Bloomberg News survey, 21 of 29 economists expect no change in the cash rate–it is presently at 3%. Readers of NOTES are well aware that I have continually called for a rate cut in Australia solely based on the relative flatness of the 2/10 yield curve. The TWO-YEAR NOTE in Australia is yielding 2.52%, which is well under the overnight cash rate, indicating the short-end of the curve to be INVERTED. The recent economic and financial data from Australia has been weakening giving Governor Glenn Stevens reason to adjust rates lower. Prime Minister Julia Gillard has been complaining that the overly strong Aussie dollar is negatively impacting the Australian budget as business profits are down due to fierce foreign competition.

The yield curve is signaling the need to cut. The Aussie dollar has been soft of late as it is has lost a great deal of value to the KIWI and other currencies. The recent “Aussie Softness” may be that a cut is anticipated so if the interest rate is lowered be patient and see how the market reacts. More important to my thinking is what does the 2/10 yield curve do? (It closed at +58 basis points today.) If the RBA cuts and the curve doesn’t steepen–get wider–the cut will be deemed insufficient for the market resulting in more pressure on the RBA.



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One Response to “Notes From Underground: Are the French Kicking the Hornet’s Nest?”

  1. Chicken Says:

    Germany – Like the woman who says no, but really means yes?

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