Unemployment, GDP Growth, and USD Value (2011 & Early 2012)
The U.S. Federal Reserve is on record stating that there must be a significant increase in employment before the economy improves. Looking at the chart below, the evidence appears to support the Fed’s position.
GDP growth increased in each of the past four quarters with the greatest gains coming right after unemployment declined sharply in Q4 2011. Heading into 2012, employment gains appear to have stalled in January and February, with both months recording an unemployment rate of 8.3%. Does this indicate GDP growth will likewise stall, as per the Fed’s view?
Also of interest is how these factors affect the U.S. dollar. The USD’s historical use as a “safe haven” currency is likely responsible for some of the gains against the euro in the past four months. Investors will be watching closely to see if the trend continues into the next quarter.
It seems market participants are grappling between the desire to pick up some bargains following last weeks heavy equity declines and concerns about global economic growth. Despite some better news over the weekend that Germany does not intend to step in the way of the EFSF and EMS bailout funds to be combined to boost the regions firewall facility, it was Monti’s comments about Spanish concerns that could reignite Europe’s debt crisis has the EUR trading on the back foot after surprisingly stronger German data this morning.
German ifo index for March came in better than expected at 109.8. It was the fifth consecutive increase, and on the face of it, points to a modest increase in activity. However, “The near term risks remain skewed to the downside as oil prices might weigh on business profits and external demand remains sluggish, especially from other main euro-zone countries that suffer from a technical recession.” The markets initial reaction was to see a jump in EUR outright to just short of Asian overnight highs (1.3285). It was here that fresh intraday shorts took advantage of the spike.
Again, the market has lacked the impetus to breach the 1.33 option barrier trigger point. The unwillingness of many to make any more bold moves after last weeks disappointing US Industrial production numbers and Chinese and Euro-zone PMI’s has allowed Middle Eastern names to push the the single unit to test its daily low just below 1.32. Many this morning have been playing the range, pulling bids back, joining the stop-losses close to these levels while others have been gradually taking back their quick post ifo profit. The technical analysts will tell you that true support comes in around 1.3170 (10-day moving average), a region where there is sure to be stops below. Option expiries on the topside at 1.3250 will again bring in some Middle eastern selling names.
Markets focus by week’s end will be twofold. Ahead of the Euro group meeting, Germany is reportedly ready to allow a temporary increase in the overall euro-zone bailout fund. The compromise would allow the already existing commitments of the EFSF to run in parallel with the full lending capacity of the prospective ESM, boosting overall size available to about +€700b. If this plays out accordingly, the market can expect some relief. Last week’s flash estimate of Chinese manufacturing PMI suggests that the official PMI (at the end of the week) will likely fall in March. However, with the Chinese New Year holidays being in February for four out of the past five years, historically the official PMI tends to rise by +2.9 points in March from February. A result above 50 and the market should expect some Asian currency relief. So far, the market has only the enthusiasm to play the range.
The EUR bears certainly got the short end of the stick after the weaker global PMI releases. In a market where you would expect the single currency to underperform more so, has seen the rumored bottom feeders from Russia support and buy in size. Their presence, or who ever, has put off any technical attempts for the market to trigger stop losses below 1.3150 with conviction yesterday. This morning, the EUR continues to extend it gains, tackling 1.33, as more stops, on the top side now, get taken out in European trade. With China using the CNY fix and rumors of an imminent RRR cut in the overnight session had many changing their trading tact midstream.
Vanilla currency options are strangling some of the G7 currency ranges. Sovereign and semiofficial supply will look to slow the EUR’s upside. Elevation does not suite the single currency as it remains vulnerable in lofty territory. Bearish action over the past two sessions has seen the technical charts work off an overbought bias. Aggressive buyers are ever present on dips and will be armed with their tight stops. Fast money interest in EUR/JPY’s topside has being one of the biggest supports in this mornings European action. Protection of the 1.33 barrier has capped the outright sessions topside for now, allowing the currency to skulk amid its initial failure. A break above the highs will generate a fresher bullish follow through for the chartist in us.
Increasing chatter is putting further emphasis on month-end requirements and what we are supposed to expect. The meeting of quarter and month-end action tends to muddy the FX market and destroy many traders playbook and this one is no different. The recent US asset classes performance is expected to see US pension funds have a significant rebalancing need in month and quarter-end, especially given the size of the equity market rally and fixed income sell off this quarter. Logic and history would also mean significant month-end forex flow. Support for treasury’s and selling of equities would only further “muddy the waters in determining whether we have moved into a new FX paradigm whereby risk sentiment is on the up.”
For now, we have the protection of options dominating intraday movements just like EUR’s feeble 1.33 attempt this morning. We still have time, North America could reload and give it a go ahead of its new home sales data release. Thus far, February housing numbers have generally been moderately weaker than expected, with the notable exception of building permits.
The main takeaway from yesterday’s market was the strengthening of the U.S. dollar most notably against the Japanese Yen and the Euro as the result of the positive economic indicators to come out of the United States and the Federal Reserve comments on QE which have increased U.S. Treasury Yields.
The biggest story on Wall Street was published on the New York Times Op-ed section. Greg Smith a VP with Goldman Sachs publicly resigned leaving a bad mark on the investment bank which has prompted an official reply as a memo directed to all the bank’s employees. Did the last ethical GS banker walked out? or did bonus season not leave enough in his stocking?
Fitch Ratings revised the United Kingdom’s AAA rating with a negative warning, from a previous stable outlook, as it could lose the investment grade if it does not stick to the current debt cutting path. Moody’s issued a similar warning a month ago on the back of some sectors asking for a looser fiscal stance. The current British government was elected on the promise of eliminating the record high 11 percent budget deficit and progress in the first two years have been slow due to Eurozone crisis.
Analysts are debating on what adjetive to add to the slowdown of the Chinese economy. Some have used hard. Adrian Mowat from JPMorgan“China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact.” Or perhaps it’s a long landing as Michael Pettis mentions the long debate focused on political reform to adjust the growth model.
You can follow the Fed now on twitter: www.twitter.com/federalreserve
In this final installment of OANDA’s series of infographics detailing sovereign debt and credit ratings, attention turns this time to the G20 countries. This group includes the world’s largest economies together with several emerging nations poised to play a greater role in global economic matters. The G20 meets regularly to discuss pressing worldwide monetary issues with the first summit convened to address the 2007 financial crisis.
It is interesting to note that the original members of the G7 industrial nations are clustered around the top two credit rating levels, yet, for the most part, have much higher debt-to-GDP ratios than the lower-ranking countries. This is explained largely by the strength of these economies and their ability to weather economic downturns.
The lower risk these countries represent means investors are willing to accept lower yields in return for greater safety for their investment. In the graphic, the 10-year bond yield – where available – is represented by the anchor dragging behind each economy. The bigger the anchor, the greater the drag on the economy.
Customer demand improved in 11 of the 13 U.S. industry categories. The overall figure increase by 1.1 percent from the previous month, and a significant 6.5 percent from the same month last year. Building materials and gasoline stations had double digit increases (13.8% and 10.3% respectively).
Compared to February 2011 the retail sales report from the U.S. Census Bureau showed growth in all areas, which can signal a recovery that has been hinted in other economic indicator releases.
Economic Indicators
You can find the full report here: U.S. Census Bureau Retail Trade Report
The market has nearly had its fill of the Greek bond swap. Whether the strategy of fire-walling Greece is working will be answered in due course. However, for the next few hours investors’ actions will be influenced by the release of US non-farm payrolls.
Earlier this morning the Greek government said that the participation rate in the debt swap would reach +95.7%, after the collective action clause is triggered. About +85.8% of holders of Greek-law bonds and +69% of holders of Greek bonds under international law tendered for the swap. Getting investors to take large write downs clears the slate for now, but one must not confuse this as a final solution for the country’s woes. The PSI program is deemed to be the only way for Greece not to default on its debt later this month. An air tight deal should clear the way for a broader bailout with official creditors.
The market response has seen the EUR come under pressure; the participation rate is triggering collective action clauses and it’s this that the market is taking as a cue to sell the single currency. Looking beyond the immediate reaction to PSI, the single currency should remain moderately under pressure, if only because rate differentials continue to move in the USD’s favor post LTRO.
A payroll disappointment is the bigger risk, rather than a positive surprise this morning, given the degree to which hope is building that the US economy will sustain its recent solid pace of job creation. Private reports and claims data, of late, is setting this market up for a healthy +200k+ print, with the unemployment rate hovering close to +8.3%. The details of the release are expected to be strong and would likely be supportive for risk strategies, commodity and interest rate sensitive currencies. A large surprise to the upside could potentially stoke expectations of an earlier-than-expected shift in the Fed’s policy, further hurting the funding currencies (EUR and JPY).
However, this upside is perhaps limited. Once the euphoria is over, the markets will again count the Greek cost. The fact that the EUR is failing to pick up a bid tone on the Greek news is further proof that the rally that pushed the EUR to just shy of 1.35 a couple of weeks ago is running out of steam. Dealers are beginning to focus on the interest differential for market direction. Now, it’s all eyes down for NFP!
After more than half a year of back-and-forth negotiations, with both sides guilty of brinksmanship bargaining, we learned Monday that a deal had finally been reached to provide Greece with a second emergency bailout. A total of 130 billion euros, or $172 billion, has been promised to Greece with the first payment expected in time to meet the next bond repayment scheduled for March 20th.
While the accord may avoid an immediate default, there are significant strings attached to the continuation of future payouts later in the year. These are similar to the conditions set out for the initial rescue package negotiated two years ago and include both spending cuts and revenue targets. Greece’s commitment to meeting these conditions for the first package were less than impressive, leading ultimately to the ouster of former Prime Minister George Papandreou.
In this case, Papandreou successfully negotiated the terms of the first rescue package with European officials. However, Papandreou then insisted – after the deal had been worked out, mind you – that he needed to hold a public referendum before he could implement the very things to which he had already agreed to do earlier.
Cynicism aside, the conditions being imposed on Greece are rather dramatic and will assuredly lead to an intensification of the protests that have marred Greece’s major cities in recent months. Greece is expected to reduce last year’s deficit, measured at 160 percent of total GDP, to a target of 120 percent of GDP. This will require Greece to accelerate an already aggressive list of spending cuts, while simultaneously raising taxes.
Complicating matters is the fact that Greece is entering its fifth straight year of recession. As a result, revenues have declined which will force the government to raise taxes and other fees even more than originally planned. This is why many economists feel the 120 percent of GDP goal is simply not possible and fear that the riots and protests in Greece to date are merely a warm-up for what is to come.
Guillaume Menuet of Citigroup in London said he expects that as early as June, Greece will miss its deficit targets and, in his words, it would be advisable to assume Greece would face a “fully fledged, coordinated default” by the end of the year.
Joerg Kraemer, Chief Economist at Commerzbank in Frankfurt, said that it was unlikely Greece would meet the conditions of the bailout and “for the second half of the year, there is a significant probability that a frustrated EU stops payments to Greece.”
Even stronger domestic fundamental data cannot pressure US bond prices. Longer dated securities again have caught a bid on concerns that the Greek Prime minister has requested the country’s finance ministry to prepare a document on the implications of a Greek default. Earlier today Treasuries came under pressure as dealers prepared to take down +$72b of new product this week. The government is to auction +$32b in three-year notes tomorrow, followed by +$24b of 10-year debt on Wednesday and $16b long-bonds on Thursday.
Merkel and Sarkozy indicated in Paris this morning that time was running out for Greece.
Any negative headlines regarding Greece and rumors of default will only increase the markets appetite for risk aversion trading strategies. Before today, long bonds managed to back up +18bp over the past three trading sessions. Despite initially been oversold on the back of a stellar NFP report that saw the US unemployment rate improve three ticks to +8.3%, the 2/30’s yield curve has flattened -3bp to +286bp.
Prime Minister Papademos over the weekend asked the ministry “to record accurately and realistically all the consequences of the country’s exit from the euro zone.” Greece still has not come to an agreement on the austerity measures needed to qualify for a second bailout from the EU and IMF. Today, the Greek government has agreed in principle to axe -15k workers to fulfill one of Troikas conditions (a reason why the EUR has temporarily caught ‘a second wind’). Papademos needs to receive funds by March in order to avoid a ‘disorderly default’. Not helping market sentiment are the negotiations between Greece and the PSI bondholders remaining unresolved.
All parties concerned have a strong incentive to reach a deal and it would not be surprise to see an agreement in the next few days. However, once a deal is reached, markets again will begin to focus on the degree of actual participation in the swap by bondholders. The market seems to be looking for other reasons to apply risk aversion trading strategies.
The Nikkei closed at 8,929 up +97. The DAX index in Europe was at 6,764 down -2; the FTSE (UK) closed at 5,892 down -9. US indices remained in negative territory with the Dow currently trading at 12,819 down -43.
Since the early days of the Eurozone debt crisis, insiders have identified China and its $3.2 trillion in foreign reserves as a potential contributor to a Eurozone bailout fund. Today, Premier Wen Jiabao gave markets reason to believe this may yet be the case when Wen suggested that China is considering the options for how it may contribute to keeping the Eurozone together.
The original European Financial Stability Fund (EFSF) is scheduled to be superseded by the European Stability Mechanism (ESM) later this year. The ESM is expected to provide 500 billion euros ($656 billion) to the establishment of a bailout fund. Wen did not confirm whether China would contribute to the ESM directly, but this does seem to be the most logical way China could help support the region.
China Desires a Stable Euro and Eurozone
It is in China’s interest to help stabilize the Eurozone. It is estimated that up to one quarter – or roughly 620 billion euros – of China’s foreign exchange is held in euros. Shielding this investment from further decline is obviously of vital importance to China.
However, China also wants to see prosperity return to the region as quickly as possible to protect its export interests. The wider European Union is China’s largest export market with 282 billion euros worth of goods exported in 2010. Sales for 2011 continued to increase but at a slower pace and there is a growing worry that sales could soon start to decline.
German Chancellor Angela Merkel arrived in China today to kick off a three-day visit aimed largely at reassuring China that European leaders have a handle on the debt crisis.
