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ECB to the rescue: Whatever it takes 2.0 ahead?

ECB to the rescue: Whatever it takes 2.0 ahead?

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It’s been a rough two weeks in bond markets, to say the very least. Risk-off sentiment is reigning supreme. In Europe, looking at my screens this morning, iTraxx Xover—a bellwether of European high yield credit risk—jumped to its widest level since mid-2013, while the yield on 10yr German Bunds dropped to an all-time low below -0.8%.

In previous times of market turmoil, the European Central Bank (ECB) has stepped in to signal more monetary stimulus. In March 2016, after a horrendous couple of months for risk assets, the ECB announced it would ramp up its quantitative easing programme by adding corporate bonds to the shopping list. Even more dramatically, former ECB President Mario Draghi’s famous “whatever it takes” speech in July 2012 is largely recognised as one of the key factors putting an end to the European debt crisis. Considering the recent worsening of the COVID-19 situation and subsequent market reactions, all eyes are now on Christine Lagarde and her comments after the ECB’s Governing Council meeting on Thursday. In my view, essentially three options are available to the ECB this week: business as usual, measured response or big bazooka.

Option #1: Business as usual

In this scenario, the ECB simply acknowledges the heightened risks for the economic outlook and medium-term inflation in the euro area caused by COVID-19, but refrains from altering its monetary policy stance, which is already highly accommodative. The main deposit rate is kept at -0.5% and net purchase volumes under the Asset Purchase Programme (APP) continue to run at a monthly rate of €20 billion. The rationale here would be that monetary policy alone won’t be enough and that the onus is first and foremost on governments and fiscal easing. Rushing into monetary emergency measures prematurely might actually be counter-productive. The ECB switching into full-on alarmist mode could very well spook markets further. Also, considering that the ECB’s deposit rate is already deeply negative, which limits the scope of further rate cuts compared to other central banks, the ECB might conclude that it is sensible at this point to keep as much dry powder as possible to be able to act decisively later, in case the COVID-19 situation continues to worsen.

Although there may be valid reasons supporting a “business as usual” approach, I don’t think it is a likely scenario. First, expectations amongst market participants are high with regards to further monetary stimulus from the ECB. At the time of writing, the implied probability of an interest rate cut on Thursday, using overnight index swaps, is close to 100%. The ECB is under no obligation whatsoever to satisfy market expectations, of course. But avoiding the highly anticipated rate cut might fuel further turbulences in financial markets, something the ECB would rather like to prevent. Second, in a world in which other central banks—e.g. the Fed, the Bank of Australia, the Bank of Canada—have decided to cut rates in response to COVID-19, the ECB could quickly become “the odd one out” by keeping rates steady, which would put further upward pressure on the euro. The currency has already appreciated by around nearly 6% against the US dollar since mid-February. Continued strengthening of the euro would be yet another head-wind for export-driven European companies—and by extension, the eurozone economy as a whole—already suffering from weakening demand and supply chain disruption caused by COVID-19. To be clear, the ECB’s mandate does not involve actively managing the strength of the euro in the FX market. But putting an end to the recent euro rally would at least be a desirable side-effect of a rate cut, albeit not the main reason behind it, and might help in moving European inflation closer to its target through rising import prices.

In an attempt to calm markets, with the additional benefit of dampening the strength of the euro, the ECB is going to take action on Thursday, I believe. If so, the key question is of course how far will the ECB go? This leaves us with options #2 and #3.

Option #2: Measured response

In this scenario, the ECB cuts interest rates by a modest amount, say 10 basis points (bps). This would bring the main deposit rate to a new record low of -0.6%. Simultaneously, monthly net asset purchases are increased to perhaps €60 billion or even €80 billion a month. This would be a tripling or quadrupling in purchase volumes, respectively, from the current level of €20 billion, but it wouldn’t be unchartered territory. The ECB used to run its APP in the past at €60 billion (March 2015 to March 2016 and April to December 2017) and €80 billion a month (April 2016 to March 2017).

I’d say this is perhaps the most likely scenario, but arguably the least desirable one. The danger is that the ECB would get the worst of both worlds. Moderate policy action by the ECB, if not accompanied by substantial fiscal stimulus, is unlikely going to be enough to instil lasting confidence into markets that just shrugged off a 50 bps cut from the Fed. The risk-off sentiment could easily escalate further into a fully-fledged market crisis. Simultaneously, the ECB would have depleted some of its dry powder, thus limiting the scope of any additional emergency policy actions that might be necessary in the future if the adverse economic impact of the COVID-19 outbreak exceeds current projections.

Option #3: Big bazooka

The idea here be to create another “whatever it takes” moment that immediately helps calm down markets and avoid a full-blown panic amongst investors that, if left unchecked, might compromise the stability of the financial system and ultimately threaten the real economy. In this scenario, the ECB acts boldly both in terms of interest rates and asset purchases. Rates are cut by at least 25 bps, which would bring the ECB’s deposit rate to -0.75% and thus in line with the policy rate of the Swiss National Bank. In addition, APP purchase volumes are increased beyond €80 billion a month, perhaps to €100 billion. Importantly, in order to signal to market participants that the ECB still has more firepower to further upscale asset purchases in the future if necessary, certain changes to the APP rules might need to be implemented.

  • Under the rules of Public Sector Purchase Programme (PSPP) within the APP, government bond purchases are guided by the ECB capital key. Due to the combination of Germany’s high capital key weight and relatively low level of indebtedness—Germany ended 2019 with a record budget surplus of €13.5 billion after all—Bunds have become a bottleneck in the programme. In order to create headroom in a meaningful way, the capital key rule could temporarily be suspended, thus allowing the ECB to tilt purchases more heavily towards Italian BTPs, of which there are plenty. Politically this step would be highly controversial, of course. But given that at the moment Italy is more severely impacted by the COVID-19 outbreak than any other European country, the rule change seems at least justifiable. If the ECB ever wants to suspend the capital key, now is the time.
  • The rules of the Corporate Sector Purchase Programme (CSPP) within the APP do not allow for the purchase of bonds issued by banks. Since bank bonds account for around 30%, give or take, of the European investment grade corporate bond universe, their inclusion into the CSPP would help increase capacity considerably. It would also serve another purpose. Banks’ profitability would suffer from the deep rate cut in the bazooka scenario. Generating CSPP demand for bank bonds, thus effectively lowering funding costs, would help soften the blow to the European banking system.

As compelling as it may seem to take out the big bazooka, it is a high-risk strategy. If it works and a veritable crisis—both in markets and within the real economy—can be averted through decisive ECB action early on, Christine Lagarde would reach immediate superstardom amongst central bankers. However, if not flanked by fiscal easing in a concerted fashion, the bazooka approach could also easily backfire. If the measures fall flat, markets continue to tumble and the transmission of monetary stimulus into the real economy fails, there wouldn’t be an awful lot more the ECB could do going forward. And markets would know that the ECB—and other central banks—are at their wits’ end.

In summary, Christine Lagarde is not to be envied this week as the ECB is caught between a rock and a hard place. Inaction or any half-hearted measures might lead to further deterioration in market stability that could soon spiral into a full-blown crisis, affecting both financial markets and the real economy. But going “all in” now in an effort to stimulate the economy and turn around investor sentiment before things escalate any further carries the risk of being left without any room for manoeuvre later. For investors, navigating markets is going to be a tricky exercise. Given that there isn’t any obvious path to take for the ECB—or any other central bank for that matter—it is a risky strategy to bet on any particular monetary policy outcome.

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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