In what seemed to be expected actions by central banks, the BOE and the ECB, the market was presented to a new twist on an old theme: Governor Mark Carney and President Mario Draghi both invoked the language of the Fed Chairman Bernanke and provided “extended period of time” into their policy statements. The ECB has shied away from any concept of locking itself into a future commitment strategy and upon Draghi reading the prepared statement at the press conference, the EURO immediately fell to 1.2920 from 1.3020. Ninety minutes earlier, the British pound was the object of derision as the BOE announced that the U.K. Exchequer had requested that the Monetary Policy Committee adopt some “… form of forward guidance including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.”
Both Central Banks offered up views that they were somewhat perplexed by the recent rise in yields in response to market reactions to possible “tapering ” by the Fed (that is my analysis). The BOE statement said: “In the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.” The ECB also cited the economic data as being weak in Europe and that risks remain to the downside. Further adding: “The recent tightening of global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions.”
So there it is: The FED may begin removing its stimulus but the Europeans have picked up the FED glossary and are pushing back to any market-based tightening. A journalist asked President Draghi if he still held that the ECB was the most conservative of the world’s major central banks and the ECB president went into the language of the bank just imposing its REACTION FUNCTION to what may be transitory or permanent volatility. The DOLLAR rallied against the EURO and the POUND as both Carney and Draghi thumbed their noses at the FED and implied, DO WHAT YOU HAVE TO DO, WE ARE NOT PLAYING.
The question arises: Is this a new round in the global currency wars? President Draghi was asked if the ECB and BOE had discussed this new use of “extended period” language and the ECB President claimed it was coincidence. President Draghi was also asked if this new policy of forward guidance and committment to an “extended period of time” meant the OMT was dead. Draghi answered that OMT is not dead and that the effective backstop is ready to be activated. This is pure nonsense and the ECB knows it for the conditionality of austerity for any recipient of OMT funds would be economically crippled. The proof of this was in Draghi’s prepared statement at the press conference: “This being said, the remaining necessary balance sheet adjustments in the public and private sectors will continue to weigh on economic activity.”
It is not good policy to have public and private sector balance sheets simultaneously undergoing repair. If the private sector is retrenching then the public sector has to fill the void. A conservative central bank merely adds to the problem. OMT is over and the monetary spigots will be turned on … after the German elections.
***Tomorrow is unemployment Friday in the U.S. and Canada. Readers of Notes From Underground are aware that I look for clues in the U.S. from the Canadian data. Last month, Canada had an ENORMOUS increase in jobs as the market was expecting 15,000 and the actual job increase was more than 90,000. The consensus is for the Canadian jobless rate to remain at 7.1% and for a slight decrease in jobs. Again, the more important data will be the Canadian manufacturing sector, especially with the recent AUTO SALES in the U.S. so jobs in the Ontario auto factories should be robust.
The CONSENSUS view on nonfarm payrolls in the U.S. is for 165,000 jobs created. The unemployment rate, which rose last month to 7.6%, is expected to drop back down to the previous level of 7.5%, while hours worked will hold steady at 34.5 hours per week. More important will be average hourly earnings where a 0.1% rise is expected. If consumer demand is to improve, wage growth is needed, especially with the savings rate at a very low level. Because of today’s action in the currency markets and the lack of liquidity due to holiday in the U.S. It is difficult to get a handle on the impact from tomorrow’s release.
From a trading perspective, I believe a weak nonfarm number (less than 125,000) will be more telling for traders. If the U.S. dollar remains strong at the end of the day on weak data, it will tell us that what the ECB and BOE announced today will have significant impact going forward. The equity markets will be a tougher call because the SPOOS had a sizable rally on the Egyptian coup and, of course, the softening of Draghi’s rhetoric … patience.