U.S.: 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.
Europe: The ECB yesterday kept its interest rates at 1% again for the 23rd month, but kicked off a sell-off in short term German bunds on ECB president Jean-Claude Trichet’s announcement of a “possible” increase of interest rates next month. EURIBOR-OIS reacted to the news as well, tightening to 21.1bp from 24.1bp a week ago, with 3M EURIBOR breaking 1.1% for the first time since June 2009. With yesterday’s meeting, the ECB raised inflation forecasts to 2.3% for 2011, above the 2% ECB limit and December’s 1.8% forecast. The possible increase is intended to meet inflation expectations, but may further cripple the still ailing economies of Ireland and Greece. Nevertheless, the SOVXWE tightened to 175bp, in anticipation that European policymakers will now be forced to address the sovereign debt crisis. A German leader in Merkel’s CDU party told Reuters today that the country may accept a rate cut for Ireland’s bailout package if Ireland raises corporate taxes although the upcoming Irish PM seems reluctant to enact such an increase. House prices in the U.K. were -0.9% MoM v -0.5%E according to the Halifax price index.
Asia: Asian stocks moved up again yesterday with renewed confidence from the decrease in U.S. unemployment claims. The Economist reported this morning that the Australian housing market is overvalued by 56%, bringing new light to the growing bubble in Asia. Libyan rebels brace today for renewed attacks from Qaddafi loyalists, causing U.S. President Barack Obama to signal that the U.S. military is ready to defend civilians caught in the crossfire.
From Brian Yelvington of Knight Capital