Archive - Jul 7, 2011

The Governing Council of the European Central Bank (ECB) has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government. This suspension will be maintained until further notice... The suspension applies to all outstanding and new marketable debt instruments issued or guaranteed by the Portuguese government.

While train wrecks make great movie scenes, in the real world, there isn't going to be a massive debt derailment unless you give speculators and ratings agencies free reign...

And while Trichet is blatantly lying and making stuff up as he goes along, on line two we have Pimco's Mohamed El-Erian who has taken some time away from his daily blogging activity and is conducting a live Q&A on Reuters right now. Readers can follow his thoughts, which are hardly anything new as he has made his opinion known each and every day in at least one media venue, live at the link below.

A stunner in the JCT press conference, who just announced that the ECB is willing to accept any junk that comes its way. Specifically he said that the ECB has decided to suspend a rating requirement for Portuguese collateral, and that the ECB will shortly issue a press release on the matter. Obviously the bank is now making stuff up as it comes alone. He also added that the suspension will be maintained until further notice. Expect this move to affect Italian, SPanish and all other insolvent country debt shortly as it becomes all too clear that the ECB will do everything in its power to give out cash against insolvent paper. And now you know what Europe's QE looks like.

Those who wonder what JC Trichet has to say about the future of ECB monetary policy can do so below. So far the euro is not happy, in line with expectations that future rate hikes now appear very much in doubt.

Well the BLS reported Initial Claims that came above 400K for the 13th consecutive week, printing at 418K, in line with expectations of 420K (and a miss as this number will be revised to 420K or higher next week). Continuing claims came at 3,681K on expectations of 3,700K, with the prior number revised higher from 3,702K to 3,724K. As predicted last week "Both numbers this week will be revised higher next week, which will bring the rolling average far higher." In other words, post revision, today's claims data will have been a miss. Which then begs the question, considering the far better ADP number, whether employers have taken a cue from HFT machines and are now hiring and firing workers at an unseen before pace. In other news, those on EUC and Extended benefits both dropped by over 44K in the week ended June 18.

ADP has released a June private payrolls number of 157K, far above expectations of 70K, and up from a downward revised 36K previously. From the release: "Employment in the U.S. nonfarm private business sector rose 157,000 from May to June on a seasonally adjusted basis, according to the latest ADP National Employment Report released today. The estimated advance in employment from April to May was revised down, but only slightly, to 36,000 from the initially reported 38,000. Today’s ADP National Employment Report estimates employment in the service-providing sector rose by 130,000 in June, nearly three times faster than in May, marking 18 consecutive months of employment gains. Employment in the goods-producing sector rose 27,000 in June, more than reversing the decline of 10,000 in May. Manufacturing employment rose 24,000 in June, which has seen growth in seven of the past eight months." Yet despite a supposed pick up in marginally weak employment sectors, both construction and financial jobs dropped once again in June, declining by 4,000 and 3,000, respectively. The one hopeful sign is that the bulk of hiring supposedly occured at small businesses (under 500 workers): "Employment among large businesses, defined as those with 500 or more workers, increased by 10,000, while employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 59,000. Employment for small businesses, defined as those with fewer than 50 workers, rose 88,000 in June" ADP concludes: "These figures are above the consensus forecast for today’s report and for Friday’s jobs number from the BLS. Payroll employment growth at this pace usually implies a steady unemployment rate, perhaps even a modest decline." The only question now is whether we are back to the old regime when the ADP consistently beats NFP numbers and has absolutely no correlation with what the BLS reports.

With the ECB doing largely as expected, and the EUR already seeing a modest episode of selling the news, the only major news out of Europe will be the scanning for "strong vigilance" keywords out of Trichet shortly, although it is almost certain that the central bank head will tone down further rate hike expectations dramatically, unless he wishes all those Option ARMs in Spain to push every Caja beyond the bring of insolvency. So going back to the US, with the ADP number the most important economic release next, here is Citi's Steven Englander on how to trade both possible outcomes of this datapoint.

The fully priced-in rate hike has come and gone, with the ECB raising the benchmark interest rate from 1.25% to 1.50%. Now the question is what happens next: at 8:30 am is the Trichet press conference which we will carry live. Everyone will wonder if this is the end of the hiking cycle, which it almost certainly is as any more hiking will cause a full blown collapse within the PIIGS countries. If so, look for the market to promptly sell the news.

The U.K.’s Royal Mint said that first-half silver production in 2011 doubled, while gold production climbed 8.9% over 2010 levels. The Royal Mint, established in the 13th century, used 36,219 ounces of gold compared with 33,266 ounces the previous year, according to data obtained by Bloomberg News under a Freedom of Information Act request. Silver use more than doubled to 324,421 ounces in the period. The Royal Mint makes Britannia silver bullion coins and other collector silver coins. 324,421 ounces of silver at today’s prices ($36/oz) would be worth less than $12 million dollars. Mere chump change to many wealth investors and savers concerned about their investments and savings.

We get two non-core employment indicators today, with both the ADP and the Initial Claims numbers coming out in an hour. Last month ADP for the first time in a while predicted the NFP release with a high degree of confidence, although with the bulk of layoff now concentrated at the government level it will likely not disclose the full picture.

The cooling system at Fukushima's Daiichi sister plant was closed earlier today after Tepco announced that "sparks were detected". According to TEPCO this is no cause for alarm and the situation will be restored back to normal shortly. According to yet other news, after 4 months of lies, TEPCO has started telling the truth. From Reuters: "The operator of Japan's Fukushima Daini nuclear power plant, located near the tsunami-crippled Daiichi plant, on Thursday halted the cooling system at one of its reactors after electrical sparks were detected, Kyodo news agency reported. Tokyo Electric Power , the plant's operator, expects to be able to restore the cooling system at the Daini plant's No.1 reactor before the end of Thursday, Kyodo said." Fair enough. We will be sure to check in later today to validate this latest "fact."

Both completely in line with expectations. And since the BOE is anything but the PBOC which is actively tightening, the GBP barely budged on the priced in news. The minutes of the meeting will be published on July 20 and 9.30 am. And now everyone shifts their attention east to the ECB where in a 45 minutes Trichet is expected to hike rates by 25 bps or else China will have a full day on its hands buying the EUR dumpathon.

Today, the ECB will probably raise the benchmark rate to 1.5 percent, while the Bank of England will leave rates and its bond purchase program unchanged, according to economists. Per Reuters, "concern about the pace of economic recovery looks set to persuade the Bank of England to keep interest rates at rock-bottom not just this week but for months to come. UK interest rates have stood at 0.5 percent since March 2009, when a deep recession and the threat of deflation prompted central banks around the world to slash rates to record lows. Since then, inflation in Britain has returned as a force to be reckoned with. Consumer prices are rising more than twice as fast as the BoE would like, but it has been reluctant to tighten monetary policy when the government's massive fiscal tightening is already crimping growth. "The Bank can do nothing about inflation over the next six months, and will not try to," said Paul Mortimer-Lee, chief global economist at BNP Paribas. While the European Central Bank looks set to raise rates this month -- its second move since April -- all 70 economists polled by Reuters last week predicted that the BoE's key rate would stay at 0.5 percent." So with inflation at 4.5%, double the target rate, there is speculation the BOE may even commence another round of QE: "Minutes to the meeting observed that "the current weakness of demand growth was likely to persist for longer than previously thought". And several policymakers -- not just arch-dove Adam Posen -- considered that more quantitative easing could be warranted in the future if growth remained weak. Most economists, however, believe printing more money is unlikely short of a disorderly Greek debt default or similar financial crisis. "Many investors remain wary about QE and the monetary policy committee might find it difficult to sell the idea to markets with the current rate of inflation so far above target," said Philip Shaw at Investec." There is no such fear at the ECB yet: after all that particular bank's monetizations occure via separate CDOs and SPVs. Yet if Trichet does not do the expected 0.25% hike, look for the EURUSD to tumble at least 150 pips.