Notes From Underground: A Quick Note On Tomorrow’s Unemployment

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.

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6 Responses to “Notes From Underground: A Quick Note On Tomorrow’s Unemployment”

  1. Alex F Says:

    I think Draghi wanted to take further cuts off the table in order to guide the market towards a full fledged asset purchases discussion.

    But aggressive lowering of inflation forecasts combined with a floor to rates suggests the bar for additional action is very high.

  2. ShockedToFindGambling Says:

    Yra- I may be crazy, but .10 moves in rates seem pointless and counterproductive, to me. The loss of credibility for the ECB is greater negative than any economic improvement that may occur from the miniscule rate cuts…..looks desperate.

  3. Alex Says:

    Yra, Bernard Connolly, in his excellent book – The Rotten Heart of Europe says there’s only 2 ways out for Germany.

    1) Massively devalue the Euro, around 40%, or

    2) Pay money to the rest of Europe, FOREVER.

    Are those options, in your opinion, still the only proper ones, anything else being band aid on a big axe wound?

    PS. For anyone that hasn’t read the book, it’s great, offering both a historical account of the lead up to the Euro and the hard choices for the future.

    Send Yra and email, he’ll set you up with a copy.

  4. ShockedToFindGambling Says:

    Alex, haven’t read the book, but don’t think devaluing the Euro would work.

    I guess the thinking is that devaluation would make EU goods more competitive worldwide, but there are a lot of negatives……capital would flee the Euro if such a plan were instituted (if they can even get it down 40%) and Japan, China, etc. might be forced to devalue competitively, and the effect on EU inflation could be dramatic.

    With QE going on in USA, EU, Japan,isn’t competitive currency devaluation going on already?

  5. Alex Says:


    Then German will have to pay FOREVER!

    Talk about crappy choices for the German voters…

  6. yra Says:

    Great posts all–much to discuss this week and it won’t be the unemployment data.Alex,nice on the Rotten Heart of Europe–it is a must read for these times—if every reader will order 10 copies and give it away to people they value in the world of finance I could get the important book into many hands—

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