Notes From Underground: Hey Bojangles, Whose Inflation Is It Anyway?

No surprises from the ECB or the BOE in their interest rate decisions today. Yesterday I wrote that President Draghi would deliver a Gene Kelly-like press conference, dancing his way through the questions unscathed. I was wrong. Draghi tapped dance his way through the entire Q&A in Bojangles-like fashion. In far, it was so smooth he didn’t even look like he was dancing. (Combine Draghi and the big noise from New Jersey and it was a complete vaudeville show). President Draghi kept insisting that the ECB‘s mandate was inflation and he reminded his inquisitors that inflation cuts two ways and the ECB would be vigilant on any downturn to inflation, which could result in a deflationary spiral. In regards to the recent report of EU-wide inflation coming in at 0.8%, President Draghi assured that he would keep monetary policy on a continued policy of very low interest rates.

The dilemma for the ECB is that with Germany as the only country on a strong growth path with low unemployment,the Bundesbank is on record as being worried about upward pressure on prices. If inflation rises in Germany, Bundesbank President Weidmann will be pushing on the ECB to tighten  in response to German concerns. The ECB has a tale of two inflationary stories so Mario Draghi: To which mandate does the ECB adhere? “I knew a man Bojangles and he dance for you.”

***Tomorrow unemployment Friday for the U.S. and Canada. The U.S. data will be the key as the market sets up for continued improvement in the jobs situation, putting pressure on the FED and its thresholds. The consensus is for an increase of 230,000 and for the rate to hold steady at 7%. As usual, average hourly earnings will be critical to see if wages are rising, which is important to support consumer demand. The present guesstimate is for 0.2% gain. Another piece to the jobs puzzle will be the role of government jobs–local, state and federal–which, as Chairman Bernanke noted in his recent speech, have been a drag on this recovery.I f government jobs actually begin to increase, growth may sustain itself at a more robust pace. If the non farm number is under 180,000,be patient as revisions are expected upward for the November data and the market will want to see which sectors created the most jobs. Manufacturing and construction will be two keys to solid growth.

The Canadian jobs release is simultaneous with the U.S. and the consensus is for a gain of 13,000 jobs and the rate to remain at 6.9%. It is important to watch the Canadian manufacturing jobs as a window into the strength of the U.S. economy since many auto  parts are exported from North of the border. The foreign exchange market is heavily short the Canadian dollar so any sign of strong jobs growth will result in a strong Canadian dollar rally. Stay patient as the market absorbs more than the headlines.

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6 Responses to “Notes From Underground: Hey Bojangles, Whose Inflation Is It Anyway?”

  1. Chicken Says:

    Looks like not quite there, on both counts.

  2. yra Says:

    Chicken–correct you are.Amazing how well behaved the markets were as it seems traders were in disbelief—but the interest sensitive currencies have out performed–notice the Aussie especially.The Canadian data was very weak although the manufacturing jobs did increase but the recent weakness in the Canadain Dollar has been confirmed by the decline in the data of late

  3. Chicken Says:

    “the recent weakness in the Canadain Dollar has been confirmed by the decline in the data of late”

    That’s a good point. Still can’t help wondering if markets are incorrectly projecting US energy supply dynamics into economic weakness, though.

  4. yra Says:

    Chicken—the Canadian economy has weathered the credit crisis better then the rest of the G8—but that fact is leading to the canadian economy working off too much consumer credit being taken on and the market is still trying to get a feel for the new BOC Governor

  5. Dustin L. Says:

    Yra-Your Goldman solution seems prescient. I couldn’t help but think about Goldman going private while reading this article.

  6. yra Says:

    Dustin–read that piece and it laid out the logic to such a move by Goldman–but as the old saw goes about whether a whore or a “loose woman”–it comes down to price

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