The ECB and The Bank of England delivered their interest rate announcements, and, as I expected on Tuesday, the result was absolutely no change to current policy. The FED had paved the way for maintaining the present course and the Europeans were certainly not willing to risk upsetting the markets. What surprised me was the fact that the EURO CURRENCY rallied strongly as President Draghi presided over a press conference in which he put on an act of stonewalling and obfuscation that made Alan Greenspan look like a freshman debater. Wow, Mr. Draghi can evade the best of questions and believe me I listened to the entire press conference and the questions were of a very high caliber. Mr. Draghi did invoke a new strategy and that was lengthening his answers so no one could remember what he had really said in the beginning. The bottom line is this:
THE ECB WILL CONTINUE TO BUY TIME UNTIL THE GERMAN HIGH COURT RENDERS ITS DECISION ON THE LEGALITY OF THE ECB QUANTITATIVE EASE PROGRAMS–OMT, EFSF, SMP–and whatever else follows on this type of policy. The ECB president maintains take he is ready to take further decisive actions and has the tools to do so. The ECB is hiding behind the VEIL OF MANDATE so as to be able to tell the financial markets it has the flexibility to act if there is a threat to price stability. Draghi reiterated over and over that as of yet deflation is not a threat. Yes, there may be low inflation for a protracted period but DEFLATION LIKE IN JAPAN is currently not a threat. The recovery is fragile and even with the problems of the emerging markets the European economy has proved to be resilient (Mr. Fantasy). European unemployment is ultra high but the ECB MANDATE only calls for the bank to maintain price stability. I believe that once the German Constitutional Court renders its decision President Draghi will be pontificating about the deflationary threat of persistent high unemployment. But the GCC had better render a decision soon for time is running out for President Draghi, especially with the FED staying on its tapering path.
As President Draghi said today (I paraphrase): The European Treaty for the establishment of the ECB forbids “MONETARY FINANCING” of sovereign debt in the primary market, but all assets are eligible under the mandate of price stability. The question of Emerging Markets arose twice. First, would Mr. Draghi support coordinated action to aid the EMs by the G-20? And, as predicted, our hero answered only if it complied with the mandate. Hmmm, I guess there would have never been a Plaza or Louvre Accord. For central bankers everywhere the key to action is the mandate. Second, there was a great question asked by the journalist from Japan (Nikkei News), did Mr. Draghi think that the accusation by Indian Bank Governor Rajan that the developed world’s central banks were being selfish by not aiding the EMs in their current period of financial stress? Draghi said only if the decisions were not aligned with their mandates. Wow, Alan Greenspan has Mario Draghi envy.
***Unemployment day is tomorrow for the U.S. and Canada. As usual, we watch the Canadian data to catch any impact on possible strength or weakness in the U.S. Last month the Canadian non farm data was very weak, dropping 47,000 when a slight gain was expected. The Canadian rate also jumped to 7.2% from 6.9% but manufacturing jobs actually gained in Canada. The market is expecting an increase of 20,000 jobs and for the rate to drop to 7.1%. Again, manufacturing will be key, especially with the slowdown in U.S. auto sales. Canada may be stronger if today’s IVEY PMI release is a good indicator. Last month the IVEY was in sync with the unemployment data as it was a very low 46.3% but today the PMI rose to 56.8%, far above the expected 51.3%. If this is accurate the Canadian unemployment should surprise to the upside. The U.S. jobs data is also at 7:30 a.m. CST and the consensus is for a nonfarm payroll gain of 185,000 and the rate to remain steady at 6.7%. Average hourly earnings are expected to rise 0.2%, but the STOCK MARKET would like to see earnings rise so as to support consumption. The U.S. labor force has seen wages stagnate in the face of globalization. It is time for corporations to disgorge their profits from the boardroom to the shop floor as it would help boost the recovery.
Also important will be the average hourly work week to see if the Affordable Care Act is having a negative impact on hours worked. This will become a significant data piece going forward. The Congressional Budget Office (CBO) has just predicted that the health care legislation will negatively impact jobs going forward, but the CBO estimates have a record of reliability similar to that of the success of the Chicago Cubs. As Philippa Dunne and Doug Henwood of the Liscio Report point out, it is not just that the CBO record is so poor it is that “… people make policy based on these analyses.” Be cautious in trading on the unemployment report because the spinmeisters will all be trying to factor in the recent bout of severe weather as being a critical element in any major deviation from the consensus number. Also, watch to any sizable revision to last month’s horrendous NFP of 75,000, which was at least 170,000 below consensus.
***Sunday brings an important Prefecture Election in Japan. The Tokyo governorship will be decided and it has turned into a vote on the issue of bringing many of the nuclear reactors back on-line. My son thinks the Abe-backed candidate will prevail and thus while not assuring the return to nuclear power will at least give the pro-nuclear camp a boost. My view from a financial perspective is that if the nuclear plants resume operation it will be a short-term positive for the YEN and Nikkei but any YEN rally will provide the BOJ with room to increase its asset purchase and will thus drive the yen lower. But this will take a while to play out, especially as we are coming into the Japanese fiscal year-end. More on Japan next week.