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ECB’s Bazooka Support Bonds but not the Euro

ECB’s Bazooka Support Bonds but not the Euro

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4 years ago

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Overview: It is not just that the dollar soared while stocks and bonds continued to plunge.  The dollar's strength is, in effect, a powerful short-covering rally.  It was used to fund a great part of the global circuit of capital.  The circuit of capital is in reverse now, and the funding currency is being bought back. The dollar's strength is a function of the sell-off of other assets.  Meanwhile, officials continue to announce more measures to combat the economic and financial fallout of the coronavirus.  The ECB announced a substantial increase in its efforts, and the markets have responded well.  Although Asian Pacific equities saw some large declines (e.g., South Korea -8.4%, Taiwan -5.8%, Australian -3.4%) Europe equities are firmer (Dow Jones Stoxx 600 +1.4%).  The Philippines ' market re-opened for the first time since Monday (after a unilateral shutdown) and tumbled more than 13%.  US shares are trading with a firmer bias.  The more significant reaction to the ECB's moves is the dramatic rally in European bonds (around Italy -70 bp, Greece -170 bp, Spain and Portugal -45 bp, France -25 bp).  The US 10-year yield is about four basis points lower at 1.15%.  The US dollar continues to motor higher.  The Norwegian krone, dragged by the collapse of oil prices and illiquidity, has dropped around 6.5%.  The Reserve Bank of Australia delivered an emergency 25 bp rate cut, and the Australian dollar is off almost 1%.  The dollar is firmer against most of the major currencies.  The Canadian dollar is the exception, and it is little changed.  Indonesia and the Philippines cut rates too.  While the rupiah is off 4.3%, the Philippine peso is a little firmer.  Gold is pinned near its recent lows as it found new sales when poked above $1500.  Oil is rebounding smartly (~+16%) after yesterday's 24% swoon.  

Asia Pacific

Summary of policy actions in Asia-Pacific:

Japan--the BOJ offered to lend JPY2 trillion in an unscheduled auction.  Tokyo is reportedly preparing a JPY30 trillion aid package, the third effort.  
Australia--cut interest rates 25 bp to 25 bp, the effective floor and will target the three-year yield of 25 bp, as well.  It will provide A$50 bln of funds for banks
Philippines--cut the borrowing and deposit rates by 50 bp to 3.25% and 2.75%, respectively. Local markets re-opened.
Indonesia--reduced the seven-day repo rate by 25 bp to 4.5%. 

There are now more cases of the Covid-19 infection in Europe than in China.  There were no more new cases reported in Wuhan today.  The concern there is two-fold.  New clusters of infection have been traced, according to reports, to people returning from overseas.  There is also concern that as economic and social activity picks up, will there be a new flare-up?   

The dollar reached new highs for the month against the Japanese yen near JPY109.55.  Recall that on March 9, the dollar recorded a low around JPY101.20.  At JPY108, the dollar has retraced (61.8%) of its losses.  Since the high was made, the greenback has found support by JPY108.50, ahead of the option at JPY108.25 (for $1.2 bln) that expires today.  The JPY110 offers psychological resistance.  Before last weekend, the Australian dollar above $0.6200.  Earlier today, it traded to almost $0.5500.  It recovered later into the regional session to about $0.5800.  A move above $0.5825 area could spur a move toward $0.5900.  The US dollar's strength is no match for the Chinese yuan. The dollar rose about 0.75% today after a 0.6% advance yesterday.  It is above CNY7.10 for the first time since mid-October.  

Europe

The ECB held an emergency meeting as European bonds cratered.  In the five sessions since last week's meeting, the 10-year German Bund yield has risen by 50 bp.  The similar Italian bond yield is more than doubled by rising 125 bp.   Last week the ECB increased its bond-buying program from 20 bln euros a month to about 33 bln euros (averaging out the 200 bln euro increase until the end of the year).  At its peak during the sovereign bond crisis, it was buying 80 bln euros a month. Leaving aside a couple of miscues, the ECB, like other officials around the world, has slowly gotten their heads around the magnitude of the economic, financial, and social challenge that lies ahead.  

Ahead of the open of the Asian market, the ECB announced a "Pandemic Emergency Purchase Program to buy 750 bln euro of public and private debt, flexibly guided by the capital key.  The purchases will include Greek bonds, for the first time, and commercial paper.  If this is averaged out over the next nine months, which is most likely will not be, it more than doubles the current buying by 73 bln euros a month.  The issuer limit of 33% is under-review.  Moreover, now loans to small and medium-sized businesses will be acceptable collateral.  Recall the evolution.  A 20 bln euro bond-buying program was announced late last year.  Earlier this month, the ECB announced intentions to buy 120 bln euros of bonds this year.  

The Swiss National Bank did not cut rates, as some expected.  Although central banks are easing policy, those with negative rates, like the ECB and the BOJ, were reluctant to cut the negative rates any deeper too, and Sweden's Riksbank did not return to negative rates but chose to resume its bond-buying program.  The Swiss instead confirmed what many suspected, and that is it has stepped up its intervention, despite risking being taken to task by the US Treasury in its reports about the foreign exchange market. Also, the SNB tweaked the tiering or the amount of deposits subject to negative rates.  

While the ECB's announcement has helped the bond market, it has done little for the euro.  It initially extended the bounce seen in the North American afternoon after approaching $1.08.  However, it ran into fresh sales near $1.0980 in Asia and is back near the lows in the European morning.  There is an option at $1.0825 for 2.3 bln euros that expires today.  There is little chart support ahead of $1.05.  Sterling's slide is extending for an eighth session today.  On March 9, sterling settled above $1.31.  Yesterday it tested the $1.1450.  Today, it has not been below $1.1470, but there is little enthusiasm for bottom-picking from 30-year+ lows.  Ir ran into resistance in Asia near $1.1660 and has not been able to take that out in the European morning.  If it does in North America, additional resistance is seen in the $1.1700-$1.1720 area.   The UK is backtracking on its "herd immunity" approach and is closing schools and many subway (tube) stations. Prime Minister Johnson pushed against talk that Brexit (leaving the standstill agreement at the end of the year) may need to be delayed.    

America

The Federal Reserve continues to dust off support programs that were used in the Great Financial Crisis.  Support for commercial paper and prime deal lending has been announced, and yesterday support for the money market was announced.  Re-starting the facility to support asset-backed securities (backed by student loans, auto loans, credit cards) may also be necessary.  

The Senate approved the House bill, and President Trump signed it.  The bill is the second effort after a small program (~$8.3 bln) had initially been launched.  The House bill included sick-pay for small and medium-sized businesses, easier access to unemployment insurance, and food support.  Another a much larger bill is in the making.  The situation is fluid, but it is looking to be around $1.3 trillion. It would include around $500 bln for cash payments to households, perhaps means-tested, aid to the airlines (~$50 bln), and other industries (~$150 bln) and a payroll savings tax cut (which reportedly is seeing some pushback). 

The Philadelphia Fed manufacturing survey for March, like the Empire State survey at the start of the week, will give some preliminary sense of the economic dislocation that is taking place. Still, the focus may be on the weekly US jobs claims.  It is the most real-time economic report.  Today's report covers the week through last Saturday. Economists expect a modest rise, followed by a dramatic increase when this week's report is made on March 26.  Still, the risk is that there is a large bounce from the 211k reported in the week through March 7.  The median forecast on Bloomberg calls for initial weekly jobless claims to rise to 220k.  The high here in Q1 was in the middle of January at 223k.  In the coming weeks, it will soar.  Unemployment in the US is expected to more than triple, and the weekly jobless claims, while a different time series, will be a lead indicator.       

The relentless dollar appreciation for the last two weeks has not been addressed via the dramatic action of the Federal Reserve in slashing rates, resuming QE, and providing new support facilities for segments of the capital markets and bank lending.  Nor has reduced the cost of currency swaps with other central banks eased the pressure on the greenback.  In fact, the cross-currency basis swaps are again under pressure.  Our understanding of the shortage of dollars is a different type of shortage than seen during the Great Financial Crisis, which was more about counterparty risk.  Coordinated intervention is at the upper end of the escalation ladder.  More talk along these lines will likely surface unless the dollar stabilizes shortly.  

The US dollar was below CAD1.35 ten days ago.  It is near yesterday's high now above CAD1.45.  The risk-off and the collapse in oil prices are the main drivers.  The Bank of Canada has slashed rates (by 100 bp) and has resumed unconventional policies.  Support is seen CAD1.44 now, and the target is the CAD1.4690 area seen in January 2016.  The greenback saw almost CAD1.4670 in Asia earlier today. Above there, CAD1.50 beckons.  The Mexican peso continues to tumble.  The US dollar is extending it gains further into uncharted territory and is approaching MXN25.00.  Yesterday and today, the dollar found support at the previous day's settlement.  Yesterday, the dollar finished near MXN23.70.  




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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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2 hours ago

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March 9, 2024

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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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17 hours ago

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March 8, 2024

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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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17 hours ago

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March 8, 2024

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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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