A Nascent Growth Pact Begins to Take Shape

Currency in Crisis

The agenda in the euro zone is changing.  The likely outcome of the weekend elections in Greece and France are just as much an effect as a cause of the shift in the agenda.  For the first time since the crisis began, the German insistence on austerity is being complimented by the push for a growth pact.  We recognized ECB President Draghi's support for it last week as being significant.   

It is not simply that the euro zone economy as a whole is contracting, but it is also that the political backlash against more austerity is growing and producing greater political instability.  Consider what is likely to happen in France.  It is not simply that a Socialist is likely to be elected to the French presidency, something that has only happened twice (Mitterrand both times) since the end of World War II, but the anti-EU Le Pen Party is likely to secure parliamentary representation in the National Assembly in the June elections for the first time since 1986.

Firm Dollar, Eventful Week

The US dollar is paring back some of its pre-weekend losses at the start of the new week. Tokyo markets on holiday today and many European centers closed for May Day tomorrow. Asia equities generally were firmer, while European bourses are lower, but modestly so, with the Dow Jones Stoxx 600 off about 0.25% near midday in London. Financials are performing in line with the overall markets and peripheral European bonds are steady to firmer.

There have been three economic reports in Europe to note: euro zone money supply, inflation and Spanish GDP. M3 rose a stronger than expected 3.2% (consensus 2.8%). This is probably a function of the LTRO, but loans to the private sector grew a mere 0.6%, warning that credit crunch conditions persist. April CPI was a touch firmer than expected at 2.6%, unchanged from March. Spain’s economy contracted by 0.3% in Q1, which was slightly better than the 0.4% contraction the consensus had forecast.

Great Graphic: Royal Wedding

Can you believe it has been a year since the royal wedding? Yes an entire 366 days (2012 was a leap year) since this magical event:

So in honor of the anniversary here is a great graphic on weddings:

Speculative Positioning and Technical Outlook for FX

The major feature of the foreign exchange market in recent days has been the resilience of the foreign currencies, despite a stream of poor news.  As noted in last week's review of the Commitment of Traders, technical considerations struck us as more supportive for the major foreign currencies than the macro-economic backdrop.  

The latest Commitment of Traders report covers the week through April 24.  Given the further subsequent advance by the foreign currencies against the dollar in the spot market, we suspect that the next report will show the continuation of what is evident in this week's report.

The single most important take away from the new report is that for the first time since last August, the next speculative sterling position is long.  As has been seen in recent weeks, sterling's net short position has been trending lower as a combination of a reduction of short positions and an increase in long.

Great Graphic: Reading, Writing, and Earning Money

Happy Saturday! Here is a great graphic on the relationship between high school graduation rates, college graduation rates, and medium household income.

Great Graphic: GDP and Longevity

Here is an Great Graphic by Stephen Hicks using Gapminder data.  The horizontal axis is GDP per capita at purchasing power parity terms. The vertical axis is life expectancy at birth. 

It illustrates the importance of wealth on longevity.  There are of course other factors.  It suggests that life expectancy is in large a function of the distribution of economic benefits. 

There is some risk that the relationship depicted here breaks down.  Perhaps a point of diminishing returns.  Imagine a high GDP per capita country where the children get inundated with sugars and fructose, producing higher levels of childhood obesity and the early onset of other health complications.

GDP Pushes Dollar Down Further

The foreign currencies are mostly extending their gains against the greenback following the initial estimate of Q1 GDP.  The 2.2% pace was a bit disappointing to market expectations which had appeared to creep higher in recent days. 

The details are a bit better as household consumption was stronger at 2.9% after a 2.1% pace in Q4 11.   This accounted for about 2 percentage points of the 2.2% growth.  How is the consumption being financed?  Real disposable income rose 0.4% in Q1 after a 1.7% gain in Q4, which may help a bit, but it seems the key was the drop in savings from 4.5% to 3.9%. 

Dollar Remains Heavy Despite News Stream

The US dollar remains heavy.  Its early gains in Asia following the S&P 2-step downgrade of Spain and a BOJ that announced an expansion of its balance sheet have been more than reversed by midday in Europe.  Sterling has completely shrugged off its unexpected contraction of Q1 GDP to trade at new multimonth highs today.  

The euro plunged through yesterday's lows--dropping a cent from the $1.3263 seen in Asia yesterday to briefly below $1.3160--before recovering back above levels seen late in NY yesterday.   The dollar is also lower against the yen, posting an outside down day--having traded above yesterday's high briefly only to break yesterday's lows and slipping to JPY80.50.  Even the Australian dollar, where the Reserve Bank of Australia is  preparing a 25, or possibly, but less likely 50 bp cut early next week, has set new two week highs. 

S&P Cuts Spain's Rating Two Notches to BBB+

Currency in Crisis

S&P cut Spain's sovereign rating by two notches to BBB+ after the NY markets closed. Although Spanish bonds have under-performed this year, with the 10-year yield rising 80 bp, despite the two LTROs and seemingly better appetite for risk, the two notch move caught the short-term market wrong-footed. In thin pre-Asian markets, the dollar, yen and US Treasuries traded higher, while equities retreated.

Not only did S&P deliver the two notch downgrade, but retained a negative outlook and warned of significant risks to both growth and fiscal policy. It signaled the conditions under which it would cut the rating again: if the debt/GDP ratio rose above 80% or if political support for reforms waned. Ironically, many private rather than official estimates put Spanish debt at or above 80% presently.

European Policy Shifting Before Key Elections

ECB President Draghi's support for a growth pact for Europe is important, perhaps under-appreciated by the market. This is not simply a tactic to deflect attention from the IMF's call that the ECB ease monetary policy further. Draghi is among the authoritative voices endorsing what some, mostly left of center, politicians, including the moderate socialist French presidential candidate Hollande, have advocated.

The ever politically adept Merkel recognizes the push toward a growth pact but will not allow Germany to be out maneuvered. While the growth pact may be on the agenda, she will aim to drive its shape. This is the way this level of European politics works.

Dollar Mixed, Drivers Indeterminate, Sterling Focus

The US dollar is mixed, but sterling remains impressively resilient in the face of disappointing economic data.  It poked through the $1.6200 level but appears to be struggling to sustain a perch.  The yen is the strongest of the majors, but ahead of tomorrow's BOJ meeting that is widely expected to take additional easing steps, it may have limited upside in North America.  The dollar faltered yesterday, unable to test the JPY81.80 resistance area and was sold to almost JPY80.80, the lowest level since last Tuesday. 

The euro itself is little changed having rallied up through $1.3260 in late Asia.  However, it reversed completely in the European morning on some disappointing data, such as EMU sentiment index, bank earnings (Stantander and Deutsche) and news that another Irish union (ICTU) will campaign against the fiscal compact.    While some support may be seen in the $1.3160-80 area, better support is seen $1.3130-50. 

Quick Note on Bernanke Press Conference

The market did not seem to respond much to the FOMC statement or the revised forecasts. It has responded to Bernanke's answer to a question about QE. Bernanke said that the Fed is prepared to do more with its balance sheet. The dollar was sold, stocks and bonds firmed.

Yet the market is getting ahead of itself. Bernanke did not break now ground. QE is not off the table, but it is not needed now. In effect Bernanke is saying if more was needed the Fed would provide more stimulus. The fact that the Fed hasn't means that it is not presently seen as needed.

Coming Growth Pact in Europe

Over the past several weeks, both Spain and Italy have indicated they will not reach the initially projected deficit targets. Nearly all the polls suggest that the (moderate) Socialist Hollande will win the second round of France's presidential contest. Greek national elections, also on May 6, may result in a fragmented parliament, undermining the probability of strong leadership. The Netherlands are on the verge of being formally (rating action) or informally (market behavior) pushed out of the core.

These events mark the beginning of the push back against German-led austerity, but it is even bigger as the IMF's call for the ECB to cut rates illustrates. Draghi, however, is more than reluctant and the IMF's recommendation is likely to fall on deaf ears. Instead, Draghi supported a call for a growth compact, like his fellow countryman and Italian PM Monti and politicians like Hollande.

Durable Goods Irony

Durable goods orders dropped 4.2% in March, more than twice the decline the consensus expected and the largest drop in three years.  Yet, the details are not as poor and, if anything, economists may revise up their forecasts for Q1 GDP, due out Friday. 

The key measure for GDP purposes is shipments of non-defense capital goods excluding aircraft.  This measure jumped 2.6% in March after rising 1.9% in February.    Our 2.25-2.50% estimate for Q1 GDP still seems fair. 

UK Negaitve Surpise, but Apple Trumps

The UK reported a disappointing 0.2% contraction in Q1.  The consensus was for a small gain.  since Q4 '11 GDP also contracted (-0.3%), many observers are claiming recession.  Yet that word is among the more slippery one economists use and has not objective meaning.  Two quarters of contracting GDP is a popular notion of recession, but in the US, for example, that does not define a recession.  The overall point is that the UK economy is best understood as broadly stagnant.   The Olympics and the Jubilee offer support to the economy in the months ahead. 

The GDP data does not change our view that the BOE will refrain from expanding its gilt purchase (QE) scheme next month, when the current program is complete.  Yet, like the Federal Reserve that does not rule out QE3, a new round of asset purchases by the BOE is dependent on the economic performance going forward. 

Great Graphic: Educational Spending by Country

I've posted recently about educational Pell grants. Here is a great graphic on educational spending.

More Lull than Turn Around Tuesday

A more stable tone in the capital markets is evident today.  The "turn around Tuesday" may simply be a short lull before new incentives emerge.  With the European auctions behind us for the session, and a light North American calendar, a consolidative tone may characterize the remainder of today's 24 hour session.

The US dollar is mostly softer.  The euro has found support ahead of the $1.3130 area with the help of non-disruptive auctions from Spain, Italy, and the Netherlands.  Higher yields were generally demanded, but no blow outs and the secondary markets took it in stride. Narrow trading ranges have dominated.  Recovery upticks into the $1.3200-20 may be sold in anticipation of more negative political and economic news.

Series of Poor News Lifts Dollar

The dollar is broadly higher to start the week.   The string of  developments has encouraged risk-off behavior.  Equity markets are lower.  Core bonds are higher.  The high beta currencies, suchas the freely traded emerging market currencies, the Australian and Canadian dollars, the euro, Swedish krona, and of course, the euro itself, are under strong pressure.  The US dollar and Japanese yen are the main beneficiaries.

The collapse of the Dutch government ostensibly over the implementation of austerity and the likelihood that the Socialist candidate Hollande wins the second round of the French election undermined the euro well before the disappointing flash PMI reports, which further undermined the euro and the risk appetite more generally.

The Week Ahead

The week ahead will be eventful.  There will be something for everyone.  There is plenty of economic data.  There are a few central bank meetings and there of course will be a heavy dose of politics.

Politics is a good place to begin.  The Dutch government collapsed on Saturday as the Freedom Party withdrew its support for the minority government over the austerity that the EU is demanding.  Fitch recently warned that the Netherlands' triple-A rating would be at risk if it not pursue austerity.   An election is unlikely to be held for several months and the minority-cum-technocrat government will still have to draft a 2013 budget.  The impact of the greater policy uncertainty may not be so much on the euro as on Dutch assets in particular.  The Dutch will sell a very long-dated bond this week and as it has a natural constituency, the auction is unlikely to be disrupted.  

Dutch Government Collapses

Seven weeks of government negotiations in the Netherlands to agree on new austerity measures failed on Saturday suggesting the German-led program for Europe is about to take head of another government and this is on the eve of the first round of the French elections, where polls consistently show the Socialist candidate Hollande poised to win the decisive second round in early May.  

We have been following this story as it first began here and then as it unfolded here.  Our work has offered two levels of analysis.  One the country-specific dynamics and the other the more systemic elements.  To be sure, we are not arguing that the Netherlands is about to default, though given political and economic considerations, as well as the greater risk that it loses its triple-A rating warns it ought to pay a larger premium of German bunds.

Speculative Positioning in the Currency Futures

Speculators did not change their positions very much in the week ending April 17, according to the latest Commitment of Traders report.  We continue to provide a dis-aggregated breakdown of the non-commercial or speculative positioning.  

The general preference among the speculative community has been evident for most of the year continues albeit to a mostly less degree.  The speculative community is net short the major foreign currencies (euro, yen, sterling, Swiss franc) and long the dollar-bloc (Australian and Canadian dollars) and Mexican peso.

Happy Earth Day from Marc to Market!

Today is earth day, and to celebrate we are going to do two things. The first is to post this iconic millennial cartoon.

The second is to post this great graphic from the Department of Energy on the potential of hydro power from existing non powered dams. Now if you are thinking this topic is familar, it should be. We've previoulsy looked at the potential of solar and wind energy in other graphics. (Click on the image.)

Great Graphic: Asset Market Correlations

Take a look at this Great Graphic.  It is some interesting work by a former colleague at HSBC, Stacy Williams.  These large correlation matrices.  The first is from 2005, pre-Lehman.  It is hard to call that period normal as, it is clear, with the benefit of hindsight, that the seeds of the crisis were already planted.  The second is from this month.

The red coloring represent high positive correlations between asset classes.  The blue are strong inverse correlations.  The other colors denote weaker relationships. 

Click on the charts to enlarge them.  The important take away is of course that there is a great deal more red on the lower chart, showing that many asset classes are more correlated than previously.  Among other things this makes the Holy Grail of investing, namely diversification, more difficult to achieve. 

In the foreign exchange market, we have noted, a breakdown in the euro's correlation with the US S&P 500 from a record 0.85 in early December 2011 to a low of last week of 0.43 (60-day % change). 

Dollar Remains Soft, Sterling in Charge

The US dollar continues to sport a soft profile, even as the political and economic risk in the euro zone is escalating.  Downside data surprises in the US have not help the greenback's case.  Sterling has led the move against the dollar with a 1.5% advance.   The yen has been the weakest of the majors, off nearly 1%,  perhaps as a function of stabilizing equity markets, cross rate adjustments (yen sales vs sterling and euros), and expectations the BOJ will ease monetary conditions next week. 

While the euro is pushing through the $1.3200 level for the first time this week, I want to fade the advance.  However, the euro has remains largely confined to a range$1.30-$1.34, with some minor exceptions since late January.  From a risk management point of view, the euro is at the center of that range, which compromise risk/reward calculations.  To navigate these waters, I am going to be patient and wait for a technical sign that the advance is exhausted. 

More Thoughts on the Importance of the French Elections

The French premium over Germany rose today to a three-month high. Rumors of a rating downgrade proved wide of the mark, but it reflects the market's anxiety about the outlook for France going forward.

As we have argued, the challenges of the euro zone are not limited to the old periphery of Greece, Ireland and Portugal. Clearly, Spain and Italy are problematic, albeit to varying degrees. Yet the contagion is reaching deeper into the core, and this is evident not only in France, but also the Netherlands, where Fitch issued cautionary remarks yesterday; warning that it could lose its coveted triple A status.

The choice confronting French voters is not as the partisans would have it as a choice between the status quo and change. Even the re-election of Sarkozy does not mean continuity. The key fact that the French political elite have to come to grips with is the divergence between France and Germany.

Dollar Little Changed

The US dollar is mostly little changed against the European currencies as the North American session is about to begin.  Sterling has retained a firm bias after the risk of a new round of official gilt purchases (QE)was reduced.  It is holding above the $1.60 level and initially extended this week's rally off the successful test on $1.58 and reached its best level since mid-Nov '11 near $1.6080.  However, it is looking a bit stretched and a test of that $1.60 level in NY looks likely. 

The yen is the weakest of the majors.  The dollar held the JPY80 level earlier this week and extended its recovery gains.  The JPY81.80 area corresponds to a retracement objective of the dollar's slide from late March peak above JPY84 and to the 20-day moving average, which the dollar has not traded above since April 4.  

When the End Began: A True Story

Killer at Large?

This week marks an anniversary that not one in a million knows about and yet, perhaps future generations will recognize it for what it is.  

Twenty seven years ago this week, the US Center for Disease Control reported its first documented case of a robot killing a person (apologies to Isaac Asimov).  It apparently took the CDC a while to come to conclusion, as the actual incident took place in July 1984. 

Apparently, and I use that word advisedly, a worker had been pinned against a safety pole by an industrial robot. The robot's pressure on the man's chest reportedly cause a heart attack.  

As we cast around looking for ultimately causes for what ails us, rest assured the truth, as they say, is out there.  

Great Graphic: A Woman's Worth

Ann Romney's resume or lack thereof has sparked interest in the role women play in the American economy. Following the dissapointing job numbers for March, President Obama commented on the role of women in the economy during a White House conference on the topic.

Yesterday was Equal Pay Day (I know it seems like just yesterday we were celebrating Equal Pay Day 2011). The Huffington Post wrote a great piece about about the AAUW's (American Association of University Women) research on the wage gap. In short the wage gap has improved in recent decades from 59% in 1970 to 77% in 2012 but anyone who has seen an episode of Mad Men knows there room for a lot of improvement. On Wall street woman earn 55% to 62% of their male counterparts.  My webmaster put together this great graphic on wage gap variance among states.

Sterling and Yen Key Movers

Owing to conflicting impulses, the US dollar is mixed today.  Sterling and the yen are the key movers and in opposite directions.  The main impetus behind sterling's advance are the minutes from the BOE's MPC meeting where the dove Posen capitulated, leaving only Miles in favor extending gilt purchases and even then his vote appeared to be finely balance, suggesting he will give it up as well.  This supports our expectation that when the current program is over next month that the BOE, like the ECB and Fed, will adopt a wait-and-see stance.  

The less dovish minutes then propelled sterling toward, but not through the $1.60 level.  Sterling sis more pronounced on the crosses.  The euro fell through the GBP0.8200 level for the first time since 2010.  The break has been sufficient to trigger the barriers and stops believed to have be placed there, but the momentum is stalling a bit near GBP0.8180, though near-term potential extends toward GBP0.8140.

Crystallizing the Difference

Currency in Crisis

The poltical realist in us says the golden rule is "he with the gold makes the rules". Germany has the gold (financial prowess) so it sets the rules as the "first among equals" in the euro zone. It is insisting on the austerity and economic restructuring as the only real way to deal with a debt crisis.

We argued that 3 No's characterize the investment climate in Europe.  No euro zone joint bond.  No ECB sovereign backstop.  No euro zone break up.  We concluded in this formulation that Germany is condemning the euro zone to a protracted period of stagnation, or worse, and social and political pressures. 

Thoughts about the French Election

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WSJ Market Beat

If the first quarter was about absorption of the ECB's LTRO, the second quarter will be about politics. This weekend's first round of the French presidential election kicks of the quarter that will include:

* Greek national elections, where polls warn that the current coalition government may not be returned, increasing the uncertainty.

* Italian municipal elections which will be, at least in part, a referendum on Monti, who has seen his support wane since the labor reform was unveiled.

* Two German state elections, which may see the FDP further marginalized, making a grand coalition next year more likely.

* Irish referendum on the fiscal compact. Due to qualified majority procedures, an Irish rejection would not prevent the adoption of the fiscal compact, but would jeopardize Irish access to the ESM, should it be needed.

* After the second round of the French presidential election in early May, there is the parliamentary election in June.

The first round of the French elections looks to be a dead heat between Sarkozy and the Socialist Party's Hollande. The two of them together are polling about 55% of the vote. Another 30% or so appears to be also nearly evenly split between Le Pen on the right and Melenchon on the left. That is almost a third of French voters may cast their vote in the first round to candidates that would prefer to drop out of EMU. The remaining votes are divided by a handful of parties.

Great Graphic: Buffett Tax and Pell Grants

Here is a great graphic from the Obama pinterest page on the impact of the Buffett Tax on Pell Grants, if you are thinking this is familiar it is because we have discussed Pell Grants here and here.

Source: barackobama.com via Barack on Pinterest

Key Take Away: Ranges Hold

The most important development in the foreign exchange market is that the ranges held.  Even though the euro edged through $1.3000 yesterday, it quickly bounced back.  Sterling held support near $1.58.  The dollar is holding above the JPY80.00 level.  

European shares rallied, even though Asian shares edged lower (though India's market posted more than 1% gains after the central bank delivered the first rate cut in three years and a 50 bp move rather than the 25 the market expected).   Financials are bouncing back and is the strongest sector today in the Dow Jones Stoxx 600.    Peripheral bond yields are mostly lower, including Spain and Italy, though Greece is bucking move and the 10-year yield is up almost 20 bp to 20.34%. 

Great Graphic: Global Energy Outlook

There is a great (interactive) graphic on world energy use over at National Geographic. Check it out.

Great Graphic: Women in the Boston Marathon

Today is Marathon Monday in Boston, and I thought I would share this great graphic on the participation of women in the race. If the image is too small you can check it out here.

Dollar Firm, Tensions Mount

Rising tensions in Europe continue to be a dominant force in the foreign exchange market, with the euro briefly dipping below the $1.30 level for the first time since mid-February. Another reflection of the tensions is the further recovery of the Japanese yen. The dollar slipped below JPY80.50 in Asia, a level not seen since late-February, despite expectations that it will report another trade deficit (for March on Wednesday) and that the BOJ may succumb to pressure and expand its asset purchases at its April 26-27 meeting. The RBA releases the minutes from its March meeting tomorrow. They are expected to show scope for lower rates and after a large local bank raised its variable mortgage rate before the weekend, there would seem to be greater pressure on the RBA to cut rates when it meets in May.

The MSCI Asia-Pacific Index fell about 0.9%, but the gap lower opening after Friday’s gap higher opening leaves a bearish island gap in its wake. Asian equity markets open late, like India and the Philippines, benefited from the more stable tone in Europe, where the Dow Jones Stoxx 600 is up about 0.5% near midday in London. Oil and gas, basic materials and utilities are leading to offset weakness in technology and continued weakness in financials.

Commitment of Traders in Currency Futures (Apr10)

The latest Commitment of Traders reports covers the week through April 10.  It shows that the net short positions in the euro, yen and sterling futures grew, while the net long Canadian and Australian dollar and Mexican peso futures positions were trimmed.  

There does appear to have been a shift in market sentiment as the second quarter gets under way.  The European debt crisis is threatening to re-emerge and Spanish credit default swaps made a new high at the end of last week.  European bank shares appear to be leading the correction of European equities.  

While the real test of the underlying improvement in the US labor market is still to come (in the coming months, the seasonal adjustment increasingly becomes a head wind, and weekly initial jobless claims are stabilizing), the US cyclical expansion is continuing and the world's largest economy is set to post the strongest growth among the high income countries.  

A Few Thoughts on China's Wider CNY Band

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Charlie Fell

China announced earlier today (April 14) that it will widen the allowable band the US dollar trades in against the Chinese yuan or renminbi.  The new band is 1% from the official fixing rather than the 0.5% that band that has been maintained since May 2007, before which the band was 0.3%.  Although the timing of the announcement was impossible to predict, some, like myself, have anticipated the move for some time.  

It is a ploy that would no doubt bring a smile to the faces of Sun Tzu and Machiavelli.  First, China is giving up something that it is not really using.  Specifically, the current band itself has rarely been utilized, which is why some observers have scoffed at the suggestion that the band would be widened.  If the Chinese officials have shied away from using the fully range that the 0.5% band offers, there is no guarantee the wider band will be explored.  

Six Takeaways from Fed Speak or The Real Troika

A number of Fed officials have spoken in recent days and there are a few takeaways that will likely set the general stage for the next FOMC meeting on April 24-25.

First, while there are more regional presidents than Governors on the Federal Reserve Board, the Board still drives Fed decisions. Here the three most important are Bernanke, Yellen and Dudley.

Second, the debate over another round of asset purchases seems to be getting less play than the debate over guidance, and the real Troika of BYD (Bernanke, Yellen and Dudley) are reading from the same song book. They are maintaining the view of late 2014, while some regional presidents have expressed leanings for an earlier (2013) move.

Great Graphic: Social Protection as Percent of GDP

A interesting great graphic from Wikipedia of the expenditures on social protection of a number of European countries.  The results may be a bit surprising.  It suggests that wealthier countries can afford to give their citizens a greater basket of goods thna less wealthy countries.  It also suggests that the periphery spending is not over-the-top as the conventional narrative would suggest.  This is not to deny the need of structural reforms, but rather to note the situation is more complicated than the profligate state spending claims would have us believe. 

China Disappointment Buoys Dollar

China's Q1 GDP disappointed expectations and market rumors and is the chief driver of the capital markets today.  The official measure of growth was 8.1%.  The consensus was 8.4% before yesterday's rumors of a 9% rise made the rounds and helped lift sentiment--seeing equities rally, gains in the dollar bloc currencies and a weaker dollar.  All that is in reverse now. 

Nevertheless the major foreign currencies look fairly resilient and the risk is that they continue to recover into the North American morning and topping out before the close of the European session.  This could see the euro move toward $1.3200 and the Australian dollar toward $1.0430, which may offer more attractive selling areas.  

Three Developments in Spain to Note

Spain has been caught in the cross hairs of the market since Prime Minister Rajoy unilaterally announced a relaxation of its fiscal target this year, after missing the target for the last couple of years. He effectively delivered a fait accommpli to the EC and a compromise was reached. Spanish bond have been under pressure with 10-year yield flirting with 6% in recent days before recovering yesterday and today.

There are three developments in Spain that might not yet been appreciated by investors.

First, the EU's economic team is set to visit Spain today and tomorrow. This is not related to the 2012 budget issue, but has apparently been planned for some time. The EU cannot be happy with Spain, though it gave preliminary support for the 2012 budget. There is no doubt Spain is in a recession and it is not clear where aggregate demand is going to come from. Households and the government are deleveraging, while exports are flagging.

Thoughts on US Data

The US reported three data series today, weekly initial jobless claims, producer prices and the trade balance.  The data offered a mixed reading.  The key take away is that economists forecasts for Q1 GDP may be increased after the smaller than expected real trade deficit, and the labor market seems to be stable.  Producer prices remain tame. 

Weekly jobless claims rose 13k to the highest level since late January.  There was a 98k decline in the continuing claims, and about a third of these seemed to reflect the reduction (voluntary or otehrwise) of those receiving extended benefits.  Nest week's survey covers the period when the national figures for April were also gathered. 

Currencies Churn, but Little Net Movement

The US dollar is a softer, but well within the recent ranges.  Over the past five sessions, the G10 currencies are mostly plus/minus 1%, with the yen being the sole exception up 1.6%.   The Australian dollar is leading the move today, spurred by the stronger than expected jump in employment (44k vs consensus 6.5k).   The Australian dollar is toying with its 20-day moving average ($1.04), which it has not closed the North American session above since early March. 

Italy's bond auction saw lukewarm reception but its bonds in the secondary market are rallying.  The yield on the benchmark 10-year bond is off about 7 bp, though the 5-year CDS is steady-to-firmer.   Separately, the euro area reported that  Feb industrial output rose 0.5%, while the consensus called for a 0.2% decline.  The surprising boost came from energy output, which rose to a six month high.  It may be weather related and unlikely to be sustained. 

The Challenge of Sterling

Many participants can single out a currency that is particularly vexing for them. Some say that the yen is the graveyard of all good (and poor) traders. Yet for many currency pairs there are some factors that seem to be more influential than others, even if over time, there is significant variability. For example, the two-year interest rate differential between the US and Japan on one hand and the dollar-yen on the other.

In this sense, sterling is especially challenging. It relationship to equity markets and interest rate differentials tends not to be very strong. It is difficult to know what to look at for clues into sterling's direction.

What are They Thinking?

In recent days, policy makers have been most noticeable by their absence. This absence has weakened their credibility and encouraging speculative attention.

The recent string of questionable tactical moves began last week when the Swiss National Bank was unable to prevent a breech of the euro/Swiss floor of 1.20. A modest change in tactics could have prevented this, even if the price action was the result of a idiosyncratic credit issue. Borrowing a military tactic, the SNB could have had a forward defense. That is to say to provide a greater likelihood that the CHF1.20 level would remain intact, it could have chosen to have its large orders (rumored to be measured in billions) to be placed say CHF1.2020, rather than CHF1.20.

Pressures Ease After Alcoa

The global capital markets have stabilized following the release of the somewhat better than expected earnings report from Alcoa, which kicks off the US earnings season.  Although Asian shares were marked down, with the MSCI Asia-Pacific Index off about 0.7%, the European markets are recovering, with financial sector leading the way (at pixel time up 2% vs Dow Jones Stoxx 600 up 0.8%).  Peripheral bond markets are mixed, but Spanish and Italian bonds ae bouncing back from yesterday's steep decline.  Portugal's bonds are bucking the trend and 10-year benchmark yield is up 25 bp and up 100 bp since the end of March. 

The euro has pushed through yesterday's highs, but the short-term technicals suggest there may not be much more upside in North America today.   The one cent bounce in the euro from yesterday's lows will likely be seen as a new selling opportunity.  Sterling's technicals look a bit better.  Support yesterday held near $1.58 and the bounce took it to $1.5940.  Support now is seen near $1.5880.  There was talk of Eastern Europe and Asia names behind the sterling demand. 

Bloomberg On the Economy: Currency Discussion

Here is an interview I did yesterday for Bloomberg on the Economy.

When Virtuous Cycles Turn Vicious

The LTRO's provided more than 1 trillion euros of liquidity. Spanish and Italian banks bought large amounts of sovereign bonds. Recent reports indicate in the Nov-Feb period, Spanish banks bought about 68 bln euros of sovereign bonds and Italian banks bought around 54 bln euros of sovereign bonds (mostly believed to be their own sovereign's). This helped fuel a decline in sovereign yields. The deluge of liquidity also helped lift the banks bonds and equities.

An under-appreciated aspect of the virtuous cycle, was the bank balance sheets improved not just because of cheaper cost of capital, but because there was a significant rally in the banks' assets--ie sovereign bonds.

Four Trade Ideas

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Short Euro: Since late Jan, the record net short euro futures position was scaled back and as of last Tuesday was at its lowest level in about 20 weeks. This was partly a function of shorts being pared and partly longs being established. As a proxy for trend followers and momentum players, we suspect that market segment is now better balanced to allow for a new leg down.

We have been focusing on the flare up of tensions in Spain and Italy. This is not only the waning impact of the LTROs, but also not country-level developments. Spanish bonds have been under pressures since Rajoy's fiscal miscues and Italian bond yields have been rising since Monti touched the "third rail" of Italian politics by proposing modifications of the infamous Article 18 that ossified Italy's labor market around 40 years ago.

Dollar and Yen Bounce Back

As full liquidity returns to the markets for the first time in nearly a week, the US dollar and Japanese yen have rallied.  First though weak short euros and long yen cross positions were squeezed in early Asia, but by the time Europe entered the fray, the moves were well under way, with the euro and sterling coming off and the yen rallying. 

The BOJ defied political pressures and some market expectations that would take additional measures to fight deflation and support the economy.  We sketched out our reasons for not expecting this, especially given that the last move was mid-Feb and had not been fully implemented.  We also highlighted the importance the BOJ's economic assessment due later in the month. 

Great Graphic: Household Expenditures across Major Countries

Here is a interesting graphic comparing US household expenditures with Canada, the UK, and Japan from the Bureau of Labor Statistics. 

Testing the SNB's Resolve and Notable Reserve Developments

In the holiday thin markets, the Swiss National Banks' resolve to defend the cap in the franc has been challenged. At the end of last week and again today, it appears the CHF1.20 level has been breached. The SNB is believed to have intervened to defend the cap that announced early last September.

The combination of thin markets, increasing tensions in the euro zone, reflected in the increase in Spanish and Italian bonds and CDS pricing (in absolute terms and relative to Germany), and some ideas of weakening official resolve in Switzerland, seemed to have encouraged the test.

The prestigious Swiss Nation Bank has an interim head but a final decision of Hildebrand's successor has not been made. The SNB is due to discuss the issue at the end of the week and may make a recommendation at that time. The interim head Thomas Jordan is thought to be the favorite.

Dollar Mixed, 4 Drivers Discussed

The US dollar is narrowly mixed as participants continue to digest the significance of the disappointing US jobs data and await full participation to return from what for many is a long holiday weekend. Asian equities were lower for the fourth consecutive session and the MSCI Asia-Pacific Index was off 0.6%.

The Nikkei’s 1.5% decline set the pace as the yen’s recovery and diminished chances of a near-term easing by China, following the somewhat higher than expected March CPI reading (3.6% vs 3.3% consensus). The Shanghai Composite lost nearly 1%. US equities are expected to open broadly lower ahead of the formal start of the earnings season on Tuesday.

Position Adjustments in Week Thru April 3

The week covered by the latest CFTC Commitment of Traders report showed only minor position adjustments were made by the non-commercial or speculative community through April 3.  Given the dramatic subsequent price action, the report may not be particularly revealing.  However, the positioning does suggest that many speculators were leaning the wrong way ahead of the FOMC minutes, rekindling of tensions in the euro zone, and the recovery of the yen.  

Euro:  The net short euro position fell to 79.5k contracts, the smallest such net position since late November 2011.  The net short position reached a record of 171.3k contracts at the end of January.  The reduction has come as both longs entered and shorts were cut.  That is what happened in the latest reporting week.  Long positions rose 5.8k contracts, while shorts wee trimmed by 3.8k contracts.  

The euro ran out of steam in front of $1.34.  The lower end of its recent trading range is in the $1.2970-$1.3000 band.  Although the US employment data may get some chins wagging about QE3, surely one monthly jobs report is insufficient, when seasonal distortions seem to be evident and other jobs data, such as the weekly initial jobless claims, hours worked and hourly earnings suggest a still gradually improving labor market.  

Marc to Market Weekend: Renewable Energy in Baseball and the Economics of Engagement Rings.

Here are a few things of interest while the markets are closed this weekend...

Robert Reich, former Secretary of Labor to President Clinton ponders if we are living in a Plutocracy

Green Tech Media explains how Major League Baseball is green with renewable energy

Talk of the Nation explores how smart phones are shifting the balance of power in retail

The Atlantic discusses the historic economics of engagement rings

Great Graphic: Obama understands the working man (and woman)

Looks like jobs are the theme of the day (real shocker). CNN has an interactive great graphic on President Obama's job creation record. It dovetails nicely with this post from last week. You can check it out here.

CNBC: Dollar after Dow's Dive

Here is an interview I did yesterday for CNBC on the dollar.

Quick Thoughts on the US Jobs Data

One word can summarize today's report:  disappointing.   The 120k rise in the headline figure was roughly half of the whisper figure.   The unemployment rate ticked down to 8.2%, but the details are disappointing.  The household survey upon which it is based showed a decline of 31k jobs and 164k people leaving the labor force. 

The easy explanation for the disappointment is, as we noted in the preview out early in the week is the weather distortion.  It helped lift the jobs report in Jan-Feb and March is a bit of a payback.  At the same time there was some good news. Factory jobs increased by 37k on top of the 31k in February and underscores another point we have made and that is the underlying strength of the US manufacturing sector and today's report bodes well for continued increase in manufacturing output. 

Jobs Data and the Week in Perspective

Currency in Crisis

The pending holidays have drained activity in the global capital markets. The US jobs report may spark some short-lived interest, though the thinness of the market may exaggerate the impact of real orders.

There are 132.7 mln employees in the US. An increase of 0.1 hours of the work week is tantamount to 330k full time equivalents. Earnings growth remains subdued. Feb's 1.9% year-over-year pace is expected to have been sustained, but despite a better labor market in Q1, earnings growth has slowed from 2.1% year-over-yea last March.

We have expressed concern about that the consensus estimate for NFP does not seem to fully reflect the risk that seasonal considerations work against a strong report and the fact that the 4-week moving average of weekly initial jobless claims showed little improvement from the February. However, the shift in sentiment sparked by the less dovish FOMC minutes may limit disappointment.

Seven Observations about the Yen

1. The yen was the weakest of the major currencies in Q1, losing about 7.2% against the dollar. There was a clear shift in both speculative and portfolio flows. The net speculative position in the IMM futures shows a swing from near the largest long position in a decade to the largest net short position since the onset of the financial crisis. In terms of portfolio flows, Japanese investors have stepped up their purchases of foreign assets compared to a year ago, while foreign investors have been net sellers of Japanese stocks and bonds in the first 13 weeks of the year, but were net buyers in the same year ago period.

This does not include the fact in the last week in March, foreign investors sold JPY3.48 trillion worth of Japanese bills, which is the most since the time series began in 2005. The sale of the bills could be related to other financial transactions, but it also may be a capitulation of yen bulls at the end of Q1. At times, fixed income managers who may be barred from taking naked currency position, express a bullish yen view through buying Japanese bills.

Dollar and Yen Advance; SNB Challenged

The US dollar and yen are continuing the rally that began earlier this week.   The latest leg is more a function of poor developments in the euro zone rather than good news in the US.  The US will report weekly initial jobless claims which are sitting at the lowest levels since the recovery began, but it is the continued sell-off in euro zone bonds (sans Germany) and European stocks (new 3-month low for the Dow Jones Stoxx 600, led by a further decline in financials) that is taking a toll today. 

Rarely does the turn of the calendar mark a turn in the markets, but there has been a notable shift here as Q2 begins. The contrast between the US and the euro zone was driven home by the less dovish thrust of the FOMC and the continued expansion indicated by the ISM reports.

Seven Observations about the Euro

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1. As the world took a step away from the proverbial abyss with the firming of the US economy and the ECB's massive liquidity injections in Q1 the dollar suffered. The re-establishment of positions that were liquidated in Q4 and unwinding of part of the large long dollar positions amassed were key drivers. Those moves appear to have run their course. The dollar will likely trade better in Q2 than in Q1. The main exception is the dollar-yen, where the yen is likely to recoup some of its outsized losses from Q1.

2. As the euro rose in Q1, implied volatility collapsed, falling to the lowest levels since Lehman's demise. Even if one does not trade options or follow them closely, it is important to appreciate that the compression of volatility is often like a coiling spring, and tends to proceed large spot moves. If vol fell as the euro rose, vol is likely to increase as the euro falls and this is what has begun happening over the past couple of sessions. Also judging from the pricing of puts and calls (as in the three month risk-reversal), the discount for euro calls in late March to its lowest level since Q1 11. However, this is reversing as participants buy puts (vol is rising so premium is being paid) and this also reflects the ascendancy of euro bears.

FOMC Sets Dollar Tone

The minutes from the March FOMC meeting have continued to drive the dollar higher, except against the yen, and bonds and stocks lower.  Especially in the context of Bernanke's recent remarks, the, should we say less than dovish, tone to the minutes caught the market wrong footed.

The FOMC in essence tweaked its economic and inflation assessment higher than seemed evident in the FOMC statement following the meeting.  It will encourage many to come around to the view outlined here that the bar to QE3 is high and requires more than the status quo, but a deterioration in conditions. 

That said, the fact that the dollar rallied further even after it was confirmed that US March auto sales were weaker than expected warns that the FOMC/QE3 issue may trump the economic data, including today's ADP data and service sector ISM.  Or perhaps , better said, given those FOMC minutes, the market is likely to show an asymmetrical response to data:  shrugging off weak data and taking the dollar higher on strong data. 

More on Pell Grants

The personal side of Pell grants which was discussed in the More than a Jobs Preview post earlier today.

 

Great Graphic: Why We Can't Go Back to the Sixties

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If the blantent sexism, racism, and smoking on Mad Men isn't enough, this great graphic from the Center for American Progess breaks down exactly why we can't go back to the '60s.

More than A Jobs Preview

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The March US jobs report will be released Friday, Good Friday, when many European countries are on holiday and the US is partially on holiday. Unlike the proverbial tree that may not make a sound, if there is no one to hear it, the data will be important even if the lack of market participation prevents much of a reaction.

Given these circumstances, perhaps what will be more useful than a review of the limited inputs that economists use to forecast the non-farm payrolls (NFP) report - which is among the more difficult of the high frequency data to forecast - would be a more focused look at the vexing problem of the decline in the participation rate.

Let’s dispense with the March jobs report by making a few observations. The risk is on the downside of the current consensus of 220k private sector jobs for two main reasons.

Japanese Fembots?

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The concept of genderizing robots is not new. The Jetsons had Rosie, a robotic maid. Star Wars had the dapper C-3PO. And of course Mike Myers gave us fembots:

This interesting article from Time discusses the release of Germinoid F, a Japanese female android. I discussed this back in 2010 in my featured article on the Japanese economy and yen An Ode to Mrs. Watanabe.

Spain and Italy Update

Spain

The more Spanish officials talk about the budget the less credible it seems. The 10-year yield fell 11 bp on Friday when the budget first presented before the weekend. Now as more detail emerge as it goes to parliament, 10-year yields are rising.

The budget assumes that yields will remain around February levels. The 10-year yield averaged a little more than 5.10% in February. It averaged 5.20% in March. Yields rose in the second half of March and are now near 5.40%. This warns that Spain is likely under-estimating its debt servicing costs. Spain plans on selling as much as 3.5 bln euros of debt tomorrow with maturities in ranging between 3 and 8 years. Some concession ahead of the auction may also be a factor weighing on bond prices today.

On top of this the problems of Spanish banks are likely to spill over and hurt the sovereign. Spanish banks have been significant buyersof the sovereign bonds. As they address the rising non-performing loan problems stemming from the real estate bubble their appetite may wane. House and land prices are still falling.

FX Today is about the Yen and the Australian Dollar

The US dollar is largely within yesterday’s trading ranges against the major foreign currencies today. The main exception is the Australian dollar, where the central bank kept rates on hold but encouraged the market to look for a rate cut next month. The unwinding of long AUD cross positions helped lift the yen after the BOJ reported the first decline in its monetary base in three years.  The dollar fell to its lowest level against the yen in nearly a month, with reported buying by Japanese importers helping to steady the greenback near JPY81.50. This in turn helped the other main yen crosses recover from earlier losses.

The yen’s strength weighed on the local share prices and the Nikkei shed 0.6%, while the regional benchmark, the MSCI Asia-Pacific Index rose about 0.3%. The inverse correlation (60-day rolling on percent change) stands at -0.35, which is the strongest inversion since late Nov 2010. There have only been a handful of times since 1990 that the inverse correlation has been greater than it is today.

Spain's Budget--Details Tomorrow

The details Spain's 2012 budget will be available tomorrow when it is presented to parliament. The government enjoys a large majority in parliament and there is no doubt that the budget will be approved. The importance for investors lies in the details that will provided to the broad stroke presentation made at the end of last week.

Prime Minister Rajoy is just past 100 days in office and there has not been much of a honeymoon. Shortly after taking office, Rajoy offered a 15 bln euro austerity package. Spanish bonds have under-performed especially since March 2 when Rajoy unilaterally raised this year's budget target from 4.4%. The EU allowed some fiscal back sliding, but not as much as Rajoy wanted. Recall Rajoy said a 5.8% deficit/GDP was reasonable this year. The compromise with the EU was for a 5.3% shortfall. Ultimately, Rajoy might be right and 5.8% is more reasonable (as in likely) than the new EU approved target.

Greek Update

Following the Greek PSI in March, one would have thought Greece is out of the news until next month's election. However, the risk of another near-term default has increased, putting it back in the spotlight.

Investors who hold Greek bonds that are government by foreign (non-Greek) laws are balking at "voluntary" debt forgiveness that private sector that held Greek bonds governed by Greek law provided.

The bonds governed by foreign law have to been voted on each individual and the investors appear to have blocked restructuring in 20 of the 36 cases. Altogether there is about $26.8 bln at stake. Of this amount, $15.3 bln appear to have resolved--ie, debt forgiveness. That leave about $11.5 bln that is the sticking point. One of those outstanding is a 450 mln euro FRN that is due May 15. It has a 30-day grace period to make the payment, according to press reports.

Dollar Marginally Softer

The US dollar is marginally softer as North American players return to their posts. The better than expected official Chinese manufacturing PMI (53.1 from 51.0 in Feb and consensus for 50.5) saw steeper losses in the greenback, but the disappointing euro zone manufacturing PMI (47.7 same as the flash but weak details) helped cap the euro in front of last week’s highs and weighed on European equities.

The UK CIPS survey surprised on the upside (52.1 vs 50.7 consensus) and sterling extended recent gains, though will struggle to extend those gains in North America today. Japan’s Tankan Survey disappointed, showing now improvement from the December report (large manufacturers diffusion index -4), with softer capex plans (1.0% vs 1.4% in December) and expectations of for a firmer yen (JPY78.14 vs JPY79.02 I n December survey).

Big Changes for Marc to Market

So after much thought I've decided that we are going to change things up here at Marc to Market. After 25+ years I've decided to retire from financial market commentary and focus on my true passion: Pop Culture.

Why make predictions about currencies, interest rates, and sovereign ratings when I can monitor celebrity relationships and weight. Just check out this Google Trends chart showing search volume in the US over 2011 for Ben Bernanke, Kate Middleton, and Kim Kardashian. I am clearly in the wrong business.