Notes From Underground: Forward Guidance Takes a Step Backward

Today the markets received the long-awaited data on the U.S. job situation and the major beneficiary seemed to be the HFT algorithms that had the number two seconds early. The stock indices, currencies and precious metals all reversed early movements and rallied just prior to the public release. Setting aside the trading action, the data continues to reflect a very tepid recovery. Nonfarm payrolls grew by 148,000 making the FED’s September 18 decision look credible. More important, the average hourly earnings grew less than expected and kept the pace of wage growth very anemic. The FED has communicated that it is the jobs rate that the markets should be mindful of when anticipating any future action to raise rates. The FED has told the markets that an UNEMPLOYMENT LEVEL of 7.0% or maybe 6.5% will be a threshold target that could prompt the FED into action.

Today, even as the NFP was weaker than expected, the jobless rate still dropped one tenth of a percent to 7.2%. A declining job rate with weak economic growth renders the FED‘s guidance very suspect. If enough potential job seekers leave the workforce and the rate drops to 6.5%, the FED will in no way react by raising rates.  I know, I know, it is not a hard target, but if the policy maker keeps moving the target it is no longer a credible policy. Many analysts have maintained that the U.S. economy would have to create 10 million jobs to return to the employment levels that existed prior to the financial crisis. This would take in all job losses as well as making way for the increase in the labor pool due to population growth. Forward guidance is another example of INTELLECTUAL INFALLIBILITY. Igor, bring another statistical cadaver to the laboratory.

***It was reported that Paris has been the scene of major protests over the U.S.-intensive efforts of spying on French Citizens–AUX ARMES, CITOYENS! This demonstration in Paris is a mere distraction for the problems of a very weak President Hollande.The rise of the right-wing extremist National Front is forcing the Socialist to find reasons to rally the French people behind a feeble leadership. (Inspector Renault, there is spying going on in the world … I am shocked.) The bigger issue is that President Hollande is trying to gain an upper-hand on the U.S. in the Transatlantic trade negotiations. Europe has just completed a trade agreement with the Canadians and many policymakers hope that a major trade pact can be reached between Europe and the U.S. The problem is that France has become a major  obstacle as many French interest groups are opposed the agricultural products that would flood Europe from the U.S. Also, the French cultural affairs group is fearful of being crushed by Hollywood and other forms of American media. In an effort to prevent the trade agreement moving forward on terms anathema to French interests we head to the barricades.

***More disturbance out of France: MarketWatch reported on a news story from Le Parisien. It quotes French Industry Minister Arnaud Montebourg saying, “The EURO is too strong and if it were 10% lower against the dollar we would increase our national wealth by 1.2%, create 120,000 jobs and reduce our deficit by 12 billion Euros…” The Minister does not say how he comes up with such figures but how could a mere American as myself possibly refute the credibility of a French enarque. Further, Mr. Montebourg gets to the heart of the matter as France, “… is appealing to the ECB to do what other governments do: to adjust the rates according to our interests. The Euro is too expensive, too strong, and a bit too German. It should be a bit more Italian, French and basically more European.” ECB President Draghi must be so thankful that Washington’s political dysfunction has kept the European problems out of the main ring of the global political circus. Complicating the French view of Europe is that the German Bundesbank has made noises that the ultra-low interest rates imposed by the ECB are causing a potential housing bubble in Germany. It seems that the two key players in the European arena have diametrically opposed ideas about how to deal with EU-wide problems.

***A note on the Mexican Peso. This currency has been an enigma of late as it has weakened even as several of the emerging market currencies have regained some strength. Even more perplexing has been the Mexican weakness in the face of a surging U.S. stock market and declining interest rates–all elements that have favored the PESO during the last few months. The Mexican Central Bank meets on Friday and it seems that many investors and traders are looking for the bank to cut interest rates again–this time to 3.5%. The Mexicans unexpectedly cuts rates at the September 6 meeting due to the fears that the U.S. tapering would have a detrimental effect on Mexico’s economic growth.

In a Bloomberg article on October 17 by Eric Martin, it was pointed out that September’s meeting was very contentious, “… with two dissenters on the five-member board preferring to wait until the Fed clarified its strategy before changing the monetary stance.” If this view is correct, the Banco de Mexico should refrain from cutting rates further as the FED’s no tapering and today’s U.S. unemployment release should keep the FED on hold and give a boost to the Mexican economy. The surprise cut by the Mexicans on September 6 saw the Mexican peso  close on its high at 759.0 on the nearest futures contract at the IMM, or 13.17 in the cash. The present 200-day moving average in the futures is 785.0 and 12.70 in the cash. If the peso is to find some renewed strength those will be areas of resistance. Friday’s Banco de Mexico’s rate decision will be a barometer of market sentiment. As always, prepare your technicals and set your risk parameters, but be cognizant of the world around you.

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7 Responses to “Notes From Underground: Forward Guidance Takes a Step Backward”

  1. Johann Says:

    you are spot on the situation in France.

  2. arthur Says:

    great macro post! From Institutional Investor Magazine. Ray Dalio: “Ben Bernanke should be considered a hero who has saved the world from a great depression.”

  3. Yra Says:

    Arthur–Ray Dalio knows its too early to make that call.If Choe En Lai thought it was too soon to call the French Revolution a success thenDalio is very early.But seriously–if he means that Bernanke halted the mass liquidation of assets preventing a downward collapse in all assets–yes bernanke learned the lessons of 1937–then yes Ben is a hero.But it is being put into question by his Woodfordian efforts of QE and forward guidance adulation.

  4. arthur Says:

    wonderful, thanks!

  5. Chicken Says:

    Cut 25bp

  6. yra Says:

    thanks Chicken–and the peso rallied

  7. arthur Says:

    Global macro Q. Where does all the liquidity go? In 1998, it all went into tech stocks. In the early part of this decade, it all went into real estate. What is the next bubble?

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