The U.S. jobs report was in line with market expectations colored by the Wednesday release of the ADP data. The market’s response was interesting in that BONDS, STOCKS AND THE DOLLAR reversed some of the reaction to ECB President Mario Draghi’s press conference on Thursday. While the jobs report seemed to SOLIDIFY an FOMC rate hike next week, the settlements on Friday raises questions about the Fed’s current strategy. Even though a rate increase is a “certainty” and with the ECB promising more liquidity at lower interest rates, the settlement prices at the week’s end were perplexing:
1. The U.S. dollar closed 2.5 percent lower on the week with a strong jobs report and the ECB promising more aggressive action on the monetary front;
2. U.S. equity prices closed virtually unchanged so the stocks are convinced that regardless of the DATA, the FED is in one-and-done mode. Giving credence to the one-and-done was the fact that the European and Japanese stock markets closed down for the week even as more liquidity was promised in Europe. The ECB has a great deal of monetary stimulus left for the month so watch for large BOND PURCHASES to power the under-performing European equity markets during the next two weeks;
3. Even in the face of a certain FED HIKE and a supposedly disappointing ECB announcement–which the market understood to mean less liquidity–the GOLD and SILVER performed well, causing end-of-year pain to hedge funds’ massive short positions. The GOLD and SILVER defied market logic and the powerful reversal is something to watch. The GOLD has been sold during the last two years when the EQUITY markets rallied and yields on bonds and short-term interest rates ROSE. But that algorithmic correlation was upset with the powerful precious metals rally on Thursday and Friday.
The breakdown in previous correlations indicate that VOLATILITY will be on the rise as we face the diminished liquidity of holiday markets. Patience will be rewarded as ALGOS become disrupted. Be prepared with technical levels to trade with the lowest risk levels as you will be surprised that prices you only dreamed of will be dancing on your screens.
***IMPORTANT NOTE FROM MARIO DRAGHI’S SPEECH from the Economic Club of New York: Bottom line of the speech was that Mario Draghi had very little to say after his press conference on Thursday and was challenged on the purpose of his SILLY SPEECH by one of the world’s best central bankers, Mervyn King. In a post-speech Q&A, King asked President Draghi if he was merely attempting to walk back the market impact of Thursday ‘s violent reaction to Draghi’s failure to deliver the huge increase in QE. At first Draghi tried to pretend he wasn’t but because it was Mervyn King asking the question, the ECB president had to admit that of course he was an interested party and therefore was trying to diminish some of the market’s adverse reaction. It was a very interesting exchange and shows how Draghi is one of the great PR manipulators who got caught with his NOSE GROWING.
Besides the Mervyn King exchange, Draghi’s speech is pure nonsense. In the opening paragraph, Draghi said: “Growth is strengthening. The output gap is gradually closing, as is the case in the euro area, or in some cases it is closed already. Insofar as monetary policy is intended as macroeconomic stabilization policy, it is succeeding.” This in unadulterated CRAP that only the access media would accept as credible. The unemployment rate across the EU is 10.7% and at a record high in France. With unemployment very high in Spain, Italy, Greece and others THE OUTPUT GAPS BY ANY MEASURE ARE NOT GRADUALLY CLOSING. Further in his speech, Draghi contradicts himself when he said, “and though the euro area unemployment rate is declining–down almost 1.5 percentage points from its 2013 peak–a great deal of slack still remains in the labor markets.”
Output gaps of the magnitude in Europe put pressure on wage growth and absolute levels, and thus on inflation. The lack of price increases in the DEBT-BURDENED European economies means that President Draghi wants to do more to push inflation higher but for the ECB and its leader the Germans may prove the IMMOVABLE OBJECT. Bundesbank President Jens Weidmann prevailed at the December 3 meeting but Draghi will certainly try to attempt to circumvent Weidmann through any means he deems necessary. For in traditional dictatorial systems, the ENDS JUSTIFY THE MEANS. Unfortunately for Draghi, the German taxpayer ends are vastly different from the ends of the debt plagued nations who are saddled with a currency out of their control.
***Today there are regional elections in France. During the first round, the Marine Le Pen-led National Front is expected to poll at least 30 percent. (If there is no outright majority during the first round, a second round will take place next week.) Twelve of the regions are currently in the Socialist Party camp so it could be a major statement about Francois Hollande’s governing ability if the Socialists fail to make it into the second round (and would send shudders throughout the EU governing elite). Le Pen’s policies are a direct assault on the powers that have seen the accretion of national powers to Brussels and the ECB.
The National Front believes that France would be stronger economically with the FRANC. Draghi fears the dissolution of the EURO more than anything (remember July 2012 and his whatever it takes speech). So if the National Front polls stronger than expected today, look for the ECB to utilize its firepower this week to provide a weaker euro and lower bond yields in an effort to support the power elite in France against those to be a threat to the status quo.
***Making life for Draghi even more difficult is that bumbling Prime Minister from the U.K., David Cameron. There was an article in the weekend Financial Times, “UK Call For Multicurrency EU Triggers ECB Alarm.” In an effort to arouse support for Britain in the EU, Cameron is pushing for all types of relief from the rules of the Lisbon Treaty and Maastricht Accord. Cameron wants the U.K. to have the benefits of the Union but not have to bear the costs and legal responsibilities. In particular, the Brits would still like to have the ability to depreciate the POUND against its trading partners as a monetary tool in times of economic stress. In the article the reporters noted: “Eurozone countries won’t want to give a competitive advantage to those outside and will use it as an excuse.”
That is what worries Draghi. David Cameron wants to push to rebrand the EU as a multicurrency union but that of course would play havoc with the sovereign debt of the EU countries. Imagine how the bonds of France would be valued it they retained the ability to depreciate their currency in times of economic stress. Oh well, when in doubt about domestic outcomes BOMB ISIS.
Tags: David Cameron, ECB, Euro, Fed, FOMC, Franc, Gold, Marine Le Pen, Mario Draghi, nonfarm payrolls, Pound, QE, silver, U.S. Dollar
December 6, 2015 at 2:35 pm |
The score card for equities for the year is not good
30 Indus +0.14
20 Tranies -12.97
15 Util -9.20
S&P +2.80
Will a down market leading up to announcement influence the Fed’s decision?????
December 6, 2015 at 3:31 pm |
Richard–I know many think the equities being down will influence the FED ,including Santelli but i am not in that camp—-I think the Fed would lose whatever credibility it has left if it merely responded to a near term equity down and Friday’s large rally seemed to seal the deal
December 6, 2015 at 4:09 pm |
Yra- Gold and silver rally means something is up. Usually I can figure out what (after the fact), but confused this time. A number of commodities are trying to make lows, at least short term.
To state the obvious, gold/silver rally means a) inflation will finally kick in, and/or b) the Central bank policies will no longer work, and/or c) the world economies are headed South (for the winter?), and/or d) the FED is behind the curve.
I know I’m hedging, but I think gold/silver should work in any of the scenarios above, maybe big.
December 6, 2015 at 8:40 pm |
“Oh well, when in doubt about domestic outcomes BOMB ISIS.” Heaven forbid interrupting ISIS self-funding ala CIA self-funding (Afghani agriculture), arming “Syrians” is the new priority.
Assuming you can fly in and out of country, this implies you’re not on the no-fly list.
December 7, 2015 at 2:13 am |
What an amazing article! Fantastic points. This really should be on the front page of the WSJ. Completely agree with you on the Fed. They will pull the trigger regardless of market action. At the end it could actually be better timing than thought because of the Xmas rally and bankers/managers bonuses support. The euro looks doomed. After all that has happened, it has just drawn everyone apart. Everyone in it “partially” in the good times only. As is, we will see a slow death of the euro and it will take a long time for everyone to go their separate ways. As a result Europe has become “The Walking Dead”.
December 7, 2015 at 3:29 pm |
“After all that has happened, it has just drawn everyone apart.”
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I’m curious: isn’t that what those in power on European continent are for? …for centuries, indeed… Feels like it’s the normal state here. I dare to say European affairs are reverting to mean.
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Every German student learns (with historic reasoning) Basic law, article 1, sentence 1: “Human dignity is inviolable”. (“Die Würde des Menschen ist unantastbar”)
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Why do students learn the obvious? Taught that to the German ruling powers! They must act upon constitution, must they?
December 7, 2015 at 9:00 am |
Gold re the daily and weekly charts still look as though they’ve got plenty of work to do before any bull can get that excited.
If I was short, and I’m not, I’d be pretty confident of covering at lower levels.
Remember the Gold pays no yield argument so lets sell it’?
Well, if US rates go higher next week isn’t that argument going to come back again to put the pressure back on the longs?
December 7, 2015 at 9:06 am |
Alex–very good point and as you point out the technicals while improving are not yet powerful to point to a sustained up move—BUT THE WAY IT REACTS POST-FOMC WILL BE VERY TELLING
December 7, 2015 at 9:36 am |
Yra and Alex- you could be right on Gold, BUT we had new lows in Gold last week, with most major miners holding well above the lows.
On Friday, as you noted, we got a strong NFP, the USD rallied, yet Gold and miners had a strong rally.
Also, hedge funds have been net short Gold for the first time ever.
Technical indicators have turned bullish.
Gold/silver extremely cheap relative to SP 500.
December 7, 2015 at 2:45 pm |
Saudi Arabia bombing the oil patch again.
December 7, 2015 at 2:52 pm |
No one has mentioned IMF giving China Yaun Reserve Currency Status monumental implications over the long haul. Hundreds of billions of dollars will be sold and held in china over the next two years and chinese huge gold reserves not reported, are there hedge. All things don/t have to be priced in dollars means even more volitility
p heff
December 8, 2015 at 1:26 am |
Are you saying US$ will begin flooding back to US or are you saying foreign demand will be strong?
December 7, 2015 at 5:33 pm |
anyone watching the transports? oil down significantly so shouldn’t transports be up?
December 7, 2015 at 9:16 pm |
american limey
Good point (in a healthy economy) when shipping revenues are still growing and cost of fuel is falling thereby expanding gross margins. However, not so in this “recovery”, which is what I believe the DJTA has been telling us all year. On top of that, the cost of labor for the transports continues to rise faster than fuel prices fall. Ask a ground shipper what his biggest headache is and he’ll say finding a driver to put in the available truck, and keeping him/her in it, which is one reason I keep current a CDL! (see http://www.manpowergroup.com/wps/wcm/connect/manpowergroup-en/home/thought-leadership/research-insights/talent-shortage-2015/talent+shortage+results)
Remember when the decline in gasoline prices was going to be a giant “tax cut” that would spur consumer spending too? Yup, another sign of our current recovery!
December 8, 2015 at 12:58 am |
So nothing to do with new truck orders collapsing 50%?
December 8, 2015 at 10:40 am
I would argue a large portion of previous truck orders was to fulfill oil patch needs when the race was on in Permian+Bakken. There will be plenty of truck drivers looking for extra work with 2016 O&G capex budgets continually in downward revision. No need to truck frac tanks/sand/water/tubing/casing when there’s no money to fix the wells…
December 8, 2015 at 12:14 pm
Good answer, Austin.
December 7, 2015 at 10:24 pm |
Hey Kevinwaspi
gotcha on the cost of labour thing, pretty much the same deal after the plague, lets hope we can get Rick or Yra to pull a Wat Tyler 🙂 as to the “gas tax cut” that went out the window when joe q public started shitting bricks about the cost of his healthcare and robots taking his job ( see Tett article in Sunday’s FT).
December 8, 2015 at 3:20 pm |
This conversation is great and covers a great deal of territory.The Dow Transports OUGHT to be on everyone’s radar as the following energy prices are not benefiting the traditional stocks—the gas tax cut has been saved not spent as health care costs and zero earnings on savings is making all people nervous—time to dust off the work on Ricardian Equivalence—-Paul Hef–good points and the time line on what you point out is of course unknown,but the Chinese have certainly been a massive accumulator of Gold and that brings us back to the $1048 level of the Indian purchase of 200 tons from the IMF on November 2,2009—that has beena very critical level
December 9, 2015 at 11:45 am |
Has the gas tax cut really been saved or has it actually been consumed by healthcare and higher rent?
December 9, 2015 at 7:32 pm
I’d say that more people are saving now as a buffer against the stupidity to come. I am constantly trying to get people to consider the most basic forms of options trade starting with covered calls with a defined probability of success. I also am asking everyone to read “where are all the customers yachts” this christmas right after you buy Yra’s book about the unflushables in Europe, I bought one and it is EXCELLENT!!! I was in the middle of the really hairy parts working for DB /Morgan Euroclear/ BFCE and credit lyonnais. Yra’s book brought it all back and gotta say it was a blast.
December 9, 2015 at 12:10 pm |
Chicken–you are dead right on and that is what the talking idiots won’t admit to for it raises many other questions—-do an overlay of the DJT with oil and ask how and why
December 9, 2015 at 1:03 pm |
Almost does look like the short treasuries long PMs trade is showing signs or life. I’d be amazed if it isn’t much less obvious and impossible to identify though.
December 9, 2015 at 7:37 pm |
while you are doing the overlay thing consider the oil drillers debt. Who do they OWE, how much has been offset to others and have we got another Lehman brother “oh f#$k” moment on our hands. Our Saudi chums are a wily bunch of Wahhabist nutters and NOW ( at long last!!!) someone is starting the publicity machine to point it out.
December 9, 2015 at 12:36 pm |
One FED guy is laughing his butt off reciting an old favorite joke of his:
“It seems that an air traffic controller was overheard giving clearance for a plane to land from the West and shortly thereafter giving the go-ahead for another to land from the East on the same runway. When a colleague pointed this out to her, she got back on the radio and said, “You all be careful now!””
December 9, 2015 at 7:24 pm |
I was chatting with the lads today ( vc’s from Sand hill) and I mentioned that I “thought” Saudi’s primary target was the loans that oil companies have and how they will not be able to service them at the current projected level of crude. I asked the question what models were they aware of that would yield a reasonably accurate threat matrix of the knock on effect on the financial market should it have the same unrecognized and poorly understood Lehman contagion. Anyone got any thoughts on my pondering OR am I way off?