Archive - Mar 4, 2011 - Story

While Hilary Clinton was talking about Libya again, her prepared remarks have now ended, and SkyNews is back to covering Libya. Some of the better realtime commentary out there.

This farce is so much better than Two and A Half Men. #winning

Two very troubling financial developments out of the Middle East...

Saudi Arabia stirring. Time for another paradrop of billions in linen to appease the increasingly restless natives. Oh wait, no mas dinero? Oops.

In a not so surprising turn of events, adverse Libyan newsflow has picked up just as expected, with Reuters reporting that the Oil facility at Zueitina, south of Benghazi, is now damaged and oil wells are now on fire, and that a Libyan rebel convoy is now headed to Ras Lanuf according to Al Jazeera even as fighting in Tripoli picks up, although as we noted previously don't expect any coverage as all the journalists there are now rounded up "for their safety from Al Qaeda" and the terrorist organizations crazy pills. The result: WTI now passing $103, wiping out more tens of billions from the US GDP, further destroying corporate margins, and otherwise adding fuel to today's vapormeltup. Gold and silver follow suit.

The front end of the curve rallied on the news, but still reflects a sizable chance (~28%) of a rate hike by year end. The job gains look to be on track, sustainable, and reflective of a population makeup where the assumptions of 150K-200K gains for a “steady state” of unemployment might no longer ring true (as a wise client pointed out to us recently). We would like to see further gains in the participation rate, which is about 200bp lower than the pre-crisis era, before we officially think that QE2 will be the end of the process. For now, the possibility of a QE2 extension or QE3 introduction post June appears to be lowered. The Fed will want that participation rate up too – as you cannot engender wage price inflation without it in all likelihood. And we will eventually need wage price inflation to match the commodity price inflation we have already engineered. For now, the Fed appears to finally be winning (however slightly) the game of chicken it is playing with the twin inflations.

At what point can one call the chart below parabolic? What can we say but BTFD, if you see one.

Wonder why the unemployment rate is at an artificially low 8.9%? Three simple words: Labor Force Participation. At 64.2%, it was unchanged from last month, and continues to be at a 25 year low. Should the LFP return to its 25 trendline average of 66.1%, the unemployment rate would be 11.6%. And indicatively, the Birth/Death adjustment was +112,000.

Total NFP increases in February: +192,000, slightly below expectations of 196,000, and below the Goldman target of 200,000. January revised from 36K to 63K. Private Payrolls increased by 222K on expectations of 200K from 68K, manufacturing jobs increased by 33K from 25K, down from a 53K revised in February. From the report: "Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate was little changed at 8.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in manufacturing, construction, professional and business services, health care, and transportation and warehousing." Average hourly earnings unchanged, and average weekly hours declined to 34.2 from 34.3.

• Fed Policy Makers Signal Abrupt End Bond Purchases June (Bloomberg)
• China's Exchanges Plan to Double Exchange-Traded Funds (Bloomberg)
• China Defense Budget to Stir Regional Disquiet (Reuters)
• Banks Face More Loan Write-Downs (WSJ)
• Honesty for Banks Is Still Such a Lonely Word (Bloomberg)
• Salgado Favors Easing Greek Bailout Terms as EU Wrangles Accord (Bloomberg)
• Foxconn to move China jobs inland (FT)
• Merkel Risks Clash Over Irish Bailout in Euro Rescue Push (Bloomberg)
• IEA: Libya Unrest Starting to Hit Oil Supplies (WSJ)

From Bank of America's Guy Moszkowski, who confirms our views that continuing subdued market participation (or as Guy calls it "market engagement") remains subdued, arguably due to the Bernanke Put which means stock market volatility is a thing of the past, at least until days in which war appears imminent: "Downgrading Citi and GS to Neutral. POs cut. Common denominator: expected weakness in Q1:11 results. Results unlikely to be dismal, and should show improvement over Q4, but we don’t expect seasonal improvement as strong as often seen in the past. Client engagement remains subdued, Mid-East turmoil likely only to further reduce customer risk appetite. Thus we are making significant cuts to our forecasts, and expect consensus to decline over the coming weeks. Increasingly, we believe investors will look to the theme of improving cash flow/return of capital via dividends/ buybacks, and also to play financials that are less–or even positively – affected by restrictions on banks such as Volcker Rules." - BofA/ML

We were about an hour early with our prediction on when the Libyan violence newsflow will pick up. The headlines are coming now. Reuters reports that Libyan forces use tear-gas to disperse anti-Gaddafi protest in Tripoli, gun fire heard. Look for oil to drift higher with stocks now completely oblivious as the ES-Crude correlation factors have been deactivated virtually everywhere.

"This NFP will not influence Bernanke as it is not about data now, it is about funding the deficit and thus more spending from Obama will need more bond purchases by Bernanke as they have to take up the slack as foreign buyers continue to diversify and few seem to see this. The Feds balance sheet is ringing alarm bells to me and M2 is exploding higher. How is it that the Fed is allowed to be the biggest holder of US debt? Who authorises this extremely dangerous situation and how does he get out of it? Printing more Dollars I guess. Good Lord the Dollar is in deep, long-term trouble in my book as history confirms that printing money ends in disaster. ALWAYS. ZIRP will continue to see money evade paper assets and look for stores of value and commodities will continue to rise until Bernanke changes his stance but I am afraid he is trapped in a “Catch 22” situation now. US real wages are falling fast and the US needs the consumer spending now to get the recovery going. That is not going to happen." Strategic Alpha

Markets up overall on the heels of optimistic labor market news in the U.S., with Europe still positive despite the ECB’s announcement of likely future rate hikes. Former Fed Chair Alan Greenspan made a statement yesterday that the fiscal stimulus, new financial regulations, and other ‘activism’ is hampering the U.S.’s recovery, contrasting sharply with current Fed Chair Ben Bernanke’s QE2-defending Humphrey Hawkins speech to Congress this week. Yesterday’s payrolls numbers taken into context with other recent data suggest that today’s payroll figures should easily top their 200KE. Expectations are for the unemployment rate itself to rise to 9.1%, a number that we would consider a victory. Recall that the prior rate dropped mainly on workers leaving the labor pool. A re-entry into the labor pool usually occurs when workers feel the economic environment gives them a good chance for finding a job. So a retracement in the unemployment number for that reason is a positive by our reckoning. The front end has sold off on yesterday’s excitement. While we believe the ECB might well be set to move, we think the Fed will hand-sit for a while and the selloff should be faded. On a production standpoint, factory orders for January are likely to rise given preliminary releases of expanding U.S. manufacturing with consensus estimates at a 2.0% increase from +0.2% prior.

The February report on nonfarm payrolls should look much better than its predecessor. Goldman expects a gain of 200,000 jobs, with risks skewed to a bigger increase. The two key issues are 1) the underlying trend in payroll growth—we think it’s at least 150,000 and perhaps stronger, 2) the extent of the weather-related “payback” in the report—most likely in the neighborhood of 50,000 or a bit more. Markets clearly expect a strong outcome. The “consensus” forecast for nonfarm payrolls has moved up considerably over the past week and is now just below our own. Yesterday’s price action suggests that market participants have positioned for a strong release. If the number is even a modest disappointment, expect a substantial sell off, especially with Libyan violence escalating again.