Notes From Underground: G-20 and Unemployment

The data “dependent” FED will have a look at the unemployment report Friday and hope to see VERY ROBUST gains in NONFARM PAYROLLS, but most importantly, to see a 0.4% rise in WAGES in order to deflect from  the recent criticism directed at them. The consensus is for an increase of 175,000 jobs and for an average hourly earnings to rise 0.3%. If the data is tepid, the long-end of the curve will attempt to rally, a reversal of the SIGNIFICANT steepening of yield curves seen during the most recent selloff in developed bond markets.

The U.S. curve has bounced from its massive support area in the mid-70s to close today at 96.5 basis points. The German 2/10 curve has steepened from a June low of 85 basis points to close at 113.8. As the Draghi /Yellen jawboning have driven bond yields higher, the short-end of the curves have remained anchored. If the jobs data is strong be patient and watch to see if the ECB buys European debt, which will lend support to the U.S. bond market. In Europe today, poor French and U.K. 10-year auctions resulted in a large rise in yields. It seems that the ECB kept its powder dry to fight another day. We will have to see if Friday is one of those days. The risk parity trade was under pressure as even weak equity markets failed to support to sovereign debt markets.

While you enjoyed July 4, Bloomberg ran a story titled, “ECB’s ‘Flexible’ QE Model Falls Short on German Bond Purchases.” I have warned that the Draghi QE program was going to be in violation of its CAPITAL KEY ratios because with a German budget surplus there was not going to be enough German debt instruments to purchase. Bloomberg reported that the ECB “… exceeded its implied target for purchases of French bonds by 1.19 billion euros, and that of Italy’s by 980 million euros, both countries that have relatively large outstanding debt.” Further, the article pointed out that the ECB’s holdings in German bunds are approaching the 33 percent limit.”

The ECB’s large-scale asset program is fraught with inconsistencies and is indicative as to how Draghi has politicized Europe’s financial system. If the well runs dry on German sovereign debt will the ECB buy German corporate bonds or follow the Japanese model by purchasing German equities to keep the QE program on track? However, if the ECB fails to meet the capital key ratios there will be court challenges to President Draghi’s policy. It appears to violate EU law because the central bank will be seen to bailing out certain states that have an excess of debt-to-GDP ratios. Italy comes to mind.

***The G-20 is meeting in Hamburg, Germany and  was considered to be a wonderful opportunity for Chancellor Merkel to posture as the most responsible leader of the “free” world, especially in juxtaposition to U.S. The television cameras have focused on the riots fomented by anarchists and thousands of protesters opposed to the Davos brand of global capitalism. Angela Merkel will also be criticized by many G-20 members for failing to shrink Germany’s large trade and current account surpluses.
In a Financial Times article Thursday titled, “IMF Chief Warns of Risks to Recovery,” Director Lagarde takes a balanced approach to Trump and Merkel. Lagarde warns, “No country is an island,” which prods at the protectionist tendencies of the Trump administration. The article notes that the IMF will criticize Germany for its “persistent trade surpluses.” The only positive for markets is the possibility that the G-20 will push for surplus nations to embark on massive stimulus programs and also give support to a global effort for economic stimulating infrastructure programs.
If infrastructure becomes the main focus of this conclave, watch for copper and other industrial metals to receive a bid. The duration of any commodity-based rally will be the most significant factor.

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3 Responses to “Notes From Underground: G-20 and Unemployment”

  1. Joe Stoutenburgh Says:

    Is there any institution more useless or irrelevant than the IMF? One grows weary of the gassy pontifications, doomsday warnings and relentless finger wagging from Christine Lagarde.

    Madame Lagarde, please tais-toi.

  2. Robert Zimmerman Says:

    It’s a given that the ECB and Japan will keep their foot on the pedal if not we are headed for hard times. Given this backdrop there is no way the Fed can continue to raise and not buy back bonds. As the markets start to feel the pain Yellen will send out her henchman to ease the pain. At that point markets will come back. Once the tax cut looks real markets will hit new highs. Late 2018 when the donkeys take back the House markets will get ugly.

  3. Chicken Says:

    Protectionist Tendencies – Marlin Perkins must be rolling over in his grave as the Serengeti is being dragged into the modern age.

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