This was a week when the markets were supposed to quietly await the conclusions of central bankers from the U.S., Europe, and Britain. The central bankers, however, seem ambivalent and mostly wanted to wait for the economic data before embarking on a new course. Most observers think the U.S. economy is the closest to a recovery of sufficient strength, which might result in monetary tightening. Bernanke, in his prepared statement and at his press conference, did not acknowledge there was a time frame for reducing his monthly purchases of U.S. bonds and other paper.
Despite his dovish comments, the bond market did not want to believe tapering of the bonds purchases would be postponed. Some believe Bernanke, who is in the last six months of his tenure as Fed chairman, is unlikely to alter his policies. Despite this, bonds rates have been appreciating. The U.S. 10-year climbed to about 2.75% before the NFP Report was released on Friday.
Earlier in the week, the U.S. ADP Employment Report forecast 200K new hires, but the NFP fell well short with only 162K. The employment rate did drop one tick to 7.4%, but this is a result of people dropping out of the labor force. There are now about 156M people in the U.S. labor force, but almost 90M working age people who have dropped from the labor force, unable to find work. That's further evidence the U.S. recovery is feeble, and the mix of full-time and part-time jobs is quite vexing. There have been 953K jobs created this year and 77%, or 731K, are part time. The pending insurance costs of Obamacare for those employers with over 49 employees who work more than 30 hours per week is given as the reason for more part timers.
When the all-important U.S. jobs number was reported well short of expectations there was then pressure on the USD. While understandable, we wonder about the strength of the pending global recovery when its leader lacks vigor, the Chinese economy remains suspect, and Europe is still in a recession. Recently, the eurozone has had a respite from their many debt-related problems. This does not mean they are solved; rather they are merely postponed. In a story from the Financial Times, courtesy of zerohedge, an IMF study says Spanish unemployment will remain high, at least 25% until 2018, another five years.
Also, Greece remains a problem. It was reported by Evans-Pritchard "that public debt will reach 176pc of GDP this year, despite the haircut already imposed on pension funds, insurers and sovereign wealth funds (Norway for instance) who loyally stood behind Greece after categorical assurances by EMU leaders that Europe would never let an EMU sovereign state default." Obviously, this is far short of the 124% debt goal to GDP in 2020, a tall order for a country that has seen its GDP contract 25% since 2007. It is obvious the Troika's rescue plan for Greece is not working. More debt will need to be written off, but any discussion of the possibility prior to the German election is not permitted.
The single currency works much better for some countries than others, but the problems have been papered over. The EUR/USD (FXE, UUP, UDN) has been on a four-week rally, from 1.2755 four weeks ago to 1.3340 this week. We note from the COT report released Friday afternoon that the large spec reduced their shorts by about 17K contracts. The weekly candle for the pair is a doji, often the signal for a turnaround.
Recently, much of the news about the British economy has been positive. On Thursday, the U.K. PMI for Manufacturing beat expectations coming in at 54.6, greater than 52.8 and 52.5 from the last report. The U.S. HPI Nationwide was up 0.8% better than last month's 0.3%. The U.K. PMI Construction number was 57, a big jump from 51 last period. The pound was trading well on Friday, running up 200 pips, and traded late in the session close to the high. But for the week, the pound was trading down from last week's close. On Monday we get the important PMI for Services, expected to be 57.5, perhaps a hard number to beat. On Wednesday, the new BOE Governor will speak. The new COT report released Friday afternoon shows the specs are still big pound shorts. The pound short is 63.9K contracts compared to only 30.5K in the euro. The open interest in the euro is much bigger, making the pound short even more interesting.
The Australian retail sales report will be announced on Monday. Then, on Tuesday, the interest rate decision will be announced by the RBA. It is expected there will be a 25-basis-point reduction to 2.5%. Their unemployment numbers will follow on Wednesday. The total spec short at the CME increased to 95.2K as we traded in new low ground for the year. Open interest in the Australian dollar (FXA, AUD/USD) is quite large, approaching the OI in the yen. Trading in the yen was subdued for the week. It did strengthen vs. the USD to 97.57, but lost ground on Thursday. There do not appear to be any major reports coming next week.
The third arrow of PM Aba's plan, now that he has control of both houses, involves fundamental changes. That will drag the vested interest screaming into the 21st century. Change of this sort does not happen quickly. We will be looking at some of this next week. The COT Report shows specs have reduced their yen short marginally, but are still short over 110K contracts.
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