The Germans Deserve Credit for Extending Credit

Wardwell’s Weekly Market Report

Observations on the Capital Markets – Week Ended July 5, 2013

  • Friday’s jobs report was the domestic market-moving news of the week
  • Other U.S. economic data: on balance, not bad… concerns about summer slowdown linger
  • China watch: calm is restored in money markets…growth is slowing
  • Japan watch: the market may be rallying because the data is good (and the Bank of Japan’s (BoJ’s) QE action)
  • Political strife in Portugal didn’t make big waves beyond its boarders
  • The European Central Bank (ECB) and the Bank of England (BoE) articulated expected future policy … it’s dovish
  • Washington and the Fed: watch, watch and wait

The Germans Deserve Credit for Extending Credit
Germany’s government agreed to (indirectly, via guarantees) provide Spain’s government-run ICO development banks with the funding to make up to €800 million of low-interest loans to small and medium-sized businesses.

Comment: One of Europe’s weaknesses is that the euro crisis led to impaired cross-border flows of credit … how can German savers lend to Spanish small businesses when they don’t trust the Spanish banks? The German and Spanish governments are directly addressing that problem. The German taxpayer is ultimately at risk if the loans aren’t repaid, but this could (like TARP) look like a good investment if it helps the Spanish recover. This could also set a very positive precedent for other nations … I think the Germans deserve credit for extending credit.

Friday’s jobs report was the Domestic Market-Moving News of the Week

Payroll employment rose 195k in June; revisions to April and May added another +70k. This was on the high side of hopes/fears. The details were solid as well. The “household” survey showed the labor force rising 177k as the labor force participation rate rose 0.1% to 63.5% … (maybe the return of “discouraged” workers?) … employment rose a solid 160k… thus a 7.6% (unchanged) unemployment rate. Average hourly earnings rose 0.4% m/m (+2.2% y/y) and the workweek was unchanged (pleased that drag from sequesters didn’t lead to a drop) … higher incomes are good for future consumer spending. Temporary employment increased to a 13-year high … this used to be a leading indicator of permanent hiring, but maybe this is the new (Affordable Care) normal.

Comment: Because bond market investors interpreted this news as increasing the risk that the Fed may slow the pace of QE at its September meeting; bonds sold off. Gold sank and stocks rallied. The market might be right, but don’t forget: the monthly jobs data is a lagging, not a leading indicator.

Political Strife in Portugal Didn’t Make Big Waves Beyond its Boarders
Portugal’s foreign and finance ministers resigned (they want austerity, just less of it), putting the government of Prime Minister Coelho at risk of collapse. Portugal’s 10-year bond yield was up 71 basis points (bps) on the week (the yield on the German 10-yr fell one basis point on the week).

Comment: Portugal has made good progress, so stretching out the time frame should be negotiable. No one (in power) wants a rerun of last year’s Greek drama.

The ECB and BOE Articulated Expected Future Policy … it’s Dovish
For the first time, the European Central Bank gave public guidance on future monetary policy, saying it would keep interest rates at or below current levels “for an extended period of time” and confirming that its bias was to ease further (it still has room to do so). Mark Carney, the new governor of the BOE, also made notably dovish statements.

Comment: “Transparency” in central bank policy guidance is now widely considered a best practice … like parenting: be clear and be consistent. The idea, in theory, is that if investors know what’s coming, they won’t be blindsided. In practice, it seems to have led to the inflation and (rather sudden) deflation in bond prices. Here’s a further question: Were they already about to make that policy shift or are they, too, reacting to the “Bernanke sell-off”?

Washington and the Fed: Watch, Watch and Wait

  • The Federal Reserve voted to adopt the Basel III capital rules for the U.S. banking system. The White House announced that the Affordable Care Act’s mandate – that companies with more than 50 full-time workers provide health insurance – has been pushed back to 2015.
  • July 17-18: Bernanke’s Congressional Humphrey-Hawkins testimony.
  • September 18-19: next Fed meeting …will the pace of QE be trimmed?

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