I’m still nursing a New Year’s hangover. It takes a long time for the mind to rid itself of all the news the mainstream media deems fit to read. But as the third rock keeps spinning, markets will keep moving and we will strive to untangle the ball of confusion. After today’s tepid ADP data the market has settled into a consensus for 175,000 nonfarm payrolls. Again, I would love to see a number greater than 250,000 just to test the recent market action. BONDS rallied, currencies rallied against the DOLLAR, precious metals are showing early year strength and commodities have held support levels in the age of TRUMFLATIONARY EXPANSIONARY EXPECTATIONS.
Posts Tagged ‘Bundesbank’
Two central banks announced interest rate decisions today: the Bank of Canada (BOC) and the Reserve Bank of New Zealand (RBNZ). The BOC left rates at 0.50% while the RBNZ SURPRISED markets by lowing its official cash rate by 0.25% to 2.25% as Governor Graeme Wheeler revealed concerns about a slowing Chinese economy and the ever-increasing global financial risks. There was no specific mention about the KIWI but Wheeler voiced concerns about the downward pressure on DAIRY EXPORT PRICES. The KIWI dropped 2 percent against the U.S. and Australian dollars following the surprise move but the explicit notation of slowing Chinese growth should be an alarm for those concerned about the impact of China on global commodity prices.
Open question to Goldman Sachs: ARE YOU ARROGANT OR DEAF? There’s a story in tomorrow’s Financial Times there is a story titled, “Goldman Sachs Makes Large Donation to Pro-EU Campaign.” It is being reported that Goldman has made a large six-figure donation to Britain Stronger in Europe. Whoever thought this up needs their head examined. There is nothing in the world more TOXIC than the big investment banks. In a potentially existential issue for British democracy, the idea of a large U.S. investment bank playing in the U.K. referendum will stir the anti-EU forces to push harder for a NO vote. The anti-euro camp has many strong, legitimate former officials working hard to push England further from the restrictions of an overzealous group of Brussels eurocrats.
After today’s violent market reaction to a wounded Mario Draghi (more on that later),the consensus numbers for tomorrow’s U.S. jobs data will render the December interest rate rise by the FED a certainty. The STREET is estimating around a 205,000 increase in nonfarm payrolls and a 0.2% increase in the very important average hourly earnings (AHE). IF PAYROLLS ARE BELOW 100,000 or IF AHE IS FLAT OR NEGATIVE THEN THE FOMC MAY BE RETICENT TO RAISE RATES AT THE DECEMBER MEETING. A gigantic upside number of more than 300,000 would not be big enough to increase the possible rate rise or even change the Fed’s sense of raising faster than the market already anticipates. It is definitely a one and done until some of the present uncertainty in the global financial system clears. This is a very reluctant move by the FED, especially now that the Germans have increased the pressure on Mario Draghi and the ECB.
After the release of the asset quality review yesterday, analysts had time to digest the information and form a modicum of market opinion prior to Monday’s market opening. I give the European authorities credit for releasing reams of information on a Sunday so the market would not be merely reacting to headlines and tweets and could actually trade on substance rather than fluff. The FED could learn a great deal about how to disseminate information from the European authorities. Yes, I know that the results were leaked on Thursday or Friday but the leaks were not significantly market-moving events. The market’s initial reactions to the 25 undercapitalized banks was a rally in the European equity markets and a short-lived rally in the European peripheral bond markets.
Did he really say that about currencies and sovereignty? In an article in tomorrow’s Financial Times it is reported that Mark Carney said during a Q&A that a “… currency union between England and an independent Scotland would be ‘ incompatible with sovereignty.'” Carney said a currency union needed three elements for success. “These were the free movement of goods and services across different parts of the currency, a banking union underpinned by common institutions such as a central bank, and elements of shared fiscal arrangements.” Fanning the flames of criticism against the euro and Brussels, Carney added: “You only have to look across the continent to look at what happens if you don’t have those components in place. A currency union is incompatible with sovereignty.”
Well, NOTES FROM UNDERGROUND gets an A+ for analysis and an F or incomplete for EXECUTION. Caught off guard by Draghi’s timing, the market never provided a rally for the more cautious trader. The euro currency began its break 55 minutes before the official ECB rate announcement as Reuters ran a story revealing the governing board’s discussion of a supposed EU500 BILLION ABS program. A leak during the meeting should provide reason for the ECB to investigate its security breaches and find out who is making money from revealing important information ahead of the governing officials. It must be like Congress, where elected representatives are allowed to be insider traders.
The financial press is filled with articles about the recent EURO weakness. During the last week the EU currency has fallen about 1.5 percent. Many pundits have opined that it is the Ukraine situation and Gaza that have made investors uneasy, thus the move into U.S. dollars. In a July 22 Bloomberg article, “Draghi Cedes Euro Control to Yellen on Fed Bets,” it is suggested that the DOLLAR is rising in anticipation of moves by the FED, especially now that the ECB has gone to negative yields on reserves. The problem for the Fed argument is that yields in the U.S. have actually softened during the last week and Fed communication has been muddled over when interest rates might possibly rise. When the ECB announced a negative interest rate June 5 the EURO/DOLLAR made a low of 1.3503. Today we are trading at 1.3465, a little below the 1.35 low but well below that day’s close of 1.3650.
In following up on the theme of the last three blog posts, it’s always a question how markets test central bank policies. As is frequently mentioned, when investors fear that central banks will err on the side of LIQUIDITY EXUBERANCE precious metals and hard assets are bought in efforts to prevent the POSSIBLE EROSION of asset values. In times when the market perceives the FED to be ahead of the inflation curve, investors buy long-term bonds and lock up higher rates in a belief that an aggressive Fed will successfully slow the economy. Thus, locking up high rates now will generate a higher real yield as the economy begins to slow, resulting in a flattening of the yield curves. When the Fed is deemed to be behind the curve, investors sell long-dated debt in belief that the FED will at some point have to aggressively raise rates to stem incipient inflation, resulting in a steepening yield curve.