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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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Pausing for thought is often a good idea, but it's not really in the nature of markets... oh, and a couple of jobs we don't fancy

July 8, 2019

ref: -” Lagarde nomination brings cheer after European rally stutters on US jobs surge”, The Financial Times

 

 

A few thoughts on a Monday morning… and the first one that comes to mind concerns the aftermath of Friday's US employment numbers for June. Whilst the headline unemployment rate and the average hourly earnings figure fractionally missed the median estimates by the smallest of margins, the key market-mover was the non-farm payrolls number -- the amount of jobs created in June -- which came in at +224,000. This was way above the median estimate of +165,000, higher in fact than any estimate that we saw.

 

One could point out that the employment data is pretty volatile and not easy to predict, and therefore one should use a little caution in advance of its release -- but that's not really in the nature of markets either. We've seen bigger margins of error between what was expected and the reality many times in the past, but the strong payrolls numbers pulled investors up a bit as it went totally against the prevailing market momentum. Bond prices have been on the charge (and bond yields on the slide) in the expectation that the US Federal Reserve will have to adopt an increasingly easy monetary policy as the economy slows. Friday's release has caused some to reassess their expectations.

 

Judging from Fed Funds futures prices, a 25-basis point rate cut at the end of this month is still a certainty, but a 50bp move is now unlikely. In fact, prices now suggest that Fed funds are marginally more likely to be just 50bp lower at year-end than they are now, rather than the 75bp lower that was in favour last week. The yield on the 10yr Treasury, which had been down to 1.94% earlier last week, jumped to 2.04% (last at 2.02%).

 

In the grand scheme of things, such an upward move is hardly massive and may well yet prove to be a blip -- after all, we often warn of the dangers of reading too much into one set of data. But perhaps the payrolls data has caused investors to think because it was in direct contrast to the previous month's disappointing numbers that had fuelled the more dovish expectations. Whatever the case, they won't have long to dwell upon it before the next key market-sensitive event: Fed Chairman Powell testifying in Congress on Wednesday and Thursday. Look out for clues as to how much "insurance” -- pre-emptive rate cuts ahead of economic headwinds -- the Fed may now be contemplating. And just for fun, watch too for whether Mr Powell can continue to remain impassive if quizzed about political interference from you-know-who...

 

European bonds have been on a tear of their own of course, with prices rocketing and yields tumbling. But they too had something of a pull-back after the US employment numbers, the correlation between global bond markets of similar rating being extremely strong. The German 10yr Bund yield had been trading as low as MINUS -0.41% and "jumped" as high as -0.345% (yeah, we know...). It last traded at -0.37%. European bonds will always be hugely influenced by what's going on across the Atlantic, but bulls in the Eurozone may feel that they have something going for them however that US Treasury bulls don't have -- Christine Lagarde's appointment as the next boss of the central bank.

 

Happy to leave behind any reservations about Ms Lagarde's lack of training as an economist and experience in formulating and applying a monetary policy, investors are instead focused on her willingness to embrace unconventional techniques to achieve desired aims. Since she is known as something of a dove, there's a strong belief that she would happily follow the outgoing ECB chief Mario Draghi's path of further ECB bond purchases (QE) and rate cuts in the pursuit of generating some inflation.

 

Her willingness to inject significant further stimulus if the economic data deteriorates cannot really be in too much doubt. What's less clear is how much stimulus will actually be required. The FT quotes Ario Emami Jedad of Fidelity National, who says that there are signs of stabilisation in the European indicators. One suspects that it might require quite a few more such signs to keep the ECB from getting stuck in again.

 

And…

 

Welcome and congratulations to new Greece Prime Minister Kyriakos Mitsokakis, whose centre-right New Democracy party comfortably beat the leftist Syriza party of Alexis Tsipras in this weekend's election. Even if Greece's lot had improved under Mr Tsipras, the new PM will have to tackle a legacy of high taxes, weak growth and unemployment. He will have to do so under the very close watch of the supervisors of the bailout deal, the strictness of which many blames for Greece's ongoing problems, and at the same time implement a backlog of structural reforms demanded in the terms the bailout. Good luck with that...

 

And...

 

Farewell and commiserations to Murat Cetinkaya, sacked as Governor of Turkey's central bank by President Erdogan for not cutting rates. We know how much the autocratic president hates high-interest rates, and how he believes that high rates actually cause high inflation -- a theory straight from the Three Stooges School of Economics. We can, however, see how on the face of it an interest rate of 24% might seem a little over the top now that the latest inflation reading came in at 15.7% last week. But the point is that 1.) it's the high rate that is finally tackling inflation, and 2.) Turkey has to prove to the international investors upon whom it relies so heavily that it is responsible and disciplined enough to stick to tough medicines. Now is not the time to be slashing rates. Disturbingly, President Erdogan has said that there will be "consequences" for those not towing his line on rates. The new Governor will be Murat Uysal, who is known as a dove, policy-wise… which is hardly a surprise and probably just as well for him.

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