Notes From Underground

Post-ECB the U.S. employment report will be of minimal importance. The market is expecting a 210,000 increase in nonfarm payrolls (NFP), a modest rise after April’s larger than expected 288,000 increase. The unemployment rate is guesstimated to rise to 6.4% from 6.3%. More importantly, the average hourly earnings is estimated to rise 0.2% after last month’s flat number. The wage gains are now the most important piece of data as the Yellen Fed has more than hinted that stagnant wages have been a perennial drag of consumer demand. It is better for wages to rise than demand to remain tepid. If wages were to outpace inflation it would act to stimulate domestic consumption.

The Canadian employment report will be released at the same time as the U.S. data and again the Canadian manufacturing will be critical for substantiating the U.S. auto recovery. Last month’s Canadian data was weak as 29,000 jobs were lost, but this month a gain of 24,000 jobs is expected with the unemployment rate remaining at 6.9%. Based on May’s U.S. auto sales, a surprise to the upside on Canadian jobs creation would put a bid to the Canadian dollar.

***I WAS WRONG! As the world knows, the ECB took the first giant step in large central banking by taking its reserve deposit rate NEGATIVE. As expected by 95 percent of the economists polled by Bloomberg, the ECB lowered the bank deposit rate to -0.10% and lowered the refinancing rate to 0.15% from 0.25%.

The initial response from the FX markets was for a drop in the euro to 1.3502 but by the end of trading the currency closed higher on the day at 1.3660. The euro lost ground against some of the other developed currencies but the market action was a classic case of sell the rumor/buy the news. The negative rate was not enough to placate markets as investors were not affected by the negative rates and the ECB action may have whetted the appetite of equity investors, resulting in foreign inflows into European equities. Also, if the ECB charges European banks for parking reserves at its facility, it may just push EU domestic banks to use their reserves to purchase even more sovereign debt because sovereigns carry a ZERO RISK WEIGHTING.

The best performers in the BOND MARKET post-Draghi were the Italian and Spanish bonds because of the attractive yields. Needless to say, the French politicians are not happy with the reaction of the EURO to the new central bank action. President Draghi also let it be known that the ECB is working on other policies to help provide more liquidity to the EU financial system. As I wrote the other night, the ECB is trying to develop a large asset-backed security (ABS)  program to help ease the burden of debt-ladened bank balance sheets.

In the ECB official press release it was noted that the ECB is “To intensify preparatory work related to outright purchases of asset-backed security.” It seems that the ECB is trying to “buy time” as it seeks unanimous approval from all members so as to purchase vast amounts of non-performing loans from troubled banks. The ECB also announced a Targeted Long Term Repo Operation (TLTRO), specifically toward freeing up cash for small and medium enterprises (SME). This is another program that President Draghi HOPES will begin to get credit flowing to everything but the financial sector.

There is a great deal to digest but this is a quick update. Not everyone was happy with the ECB decision. Germany’s Bildt newspaper raised the issue about the expropriation of German savers because of the ECB policy. An investor’s cheap loans is another saver’s financial repression.

Tags: asset-backed securities, ECB, Euro, Europe, Fed, Germany, Mario Draghi, TLTRO, U.S. nonfarm payrolls, Yellen

This entry was posted on June 5, 2014 at 10:28 pm and is filed under ECB, Europe, unemployment, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.