Risk appetite has exploded higher in the wake of QE as volatility collapsed and complacency seems to know no bounds. How long can we sustain the QE fantasy? Also, we’ve a Greek election over the weekend that is weighing on the Euro.
US employment report was….awful?
The supposed strength of the nonfarm payrolls report notwithstanding, we must also consider the household survey, which is used to create the Unemployment Rate. That survey showed a drop of 330k jobs in October and the participation rate dropped to a paltry 58.3% from 58.5%, which is the lowest level since the beginning of the year.
The supposed strength of the nonfarm payrolls report notwithstanding, we must also consider the household survey, which is used to create the Unemployment Rate. That survey showed a drop of 330k jobs in October and the participation rate dropped to a paltry 58.3% from 58.5%, which is the lowest level since the beginning of the year.
Graphic: US Household employment data
The graphic below shows the data from the household data, which many consider better than the payrolls data for showing the overall employment level. (Source of graphic: http://www.bls.gov/news.release/pdf/empsit.pdf) Draw your own conclusions, but we would note a couple of things: the overall unemployment rate supposedly topped out exactly one year ago at a shade over 10%, but the total number of workers with a job is now actually 27k less than it was a year ago (meaning all of the change in the unemployment rate has come via a reduced participation rate as discouraged workers are not declared unemployed). Second, the 35-54 year old men and women have been hit the hardest – these are the people with professional, higher paying jobs. All in all, this segment has lost well over a million jobs since last October – when unemployment was supposedly at its worst? This is awful and worrying. And to think that a lot of the consumption data might be looking stronger these days because strategic defaults and people continuing to live in “free” houses they have not yet been kicked out of means that they are able to continue to consume goods and services at the same rate as previously because they are not paying their mortgages any more.
The graphic below shows the data from the household data, which many consider better than the payrolls data for showing the overall employment level. (Source of graphic: http://www.bls.gov/news.release/pdf/empsit.pdf) Draw your own conclusions, but we would note a couple of things: the overall unemployment rate supposedly topped out exactly one year ago at a shade over 10%, but the total number of workers with a job is now actually 27k less than it was a year ago (meaning all of the change in the unemployment rate has come via a reduced participation rate as discouraged workers are not declared unemployed). Second, the 35-54 year old men and women have been hit the hardest – these are the people with professional, higher paying jobs. All in all, this segment has lost well over a million jobs since last October – when unemployment was supposedly at its worst? This is awful and worrying. And to think that a lot of the consumption data might be looking stronger these days because strategic defaults and people continuing to live in “free” houses they have not yet been kicked out of means that they are able to continue to consume goods and services at the same rate as previously because they are not paying their mortgages any more.
Risk
Now that we have all of yesterday’s data in for our Carry Trade model, we can see that nearly all measures of risk appetite jumped higher in the wake of the FOMC meeting yesterday. Junk bond spreads in particular have shot higher – amazing to think that investors are desperate to go after junk issues yielding less than 200 basis points on top of treasuries if the baseline fear here is that fiat currencies are meant to collapse here. The “logic “is so awful, it’s almost unbearable. One interesting note: EM spreads have not joined the party to the degree that volatility and other risk measures have. Just today, news emerged of HSBC warning of “bumps in the road” ahead for emerging markets. EM spreads and relative performance will be key parameters to follow in coming weeks.
Now that we have all of yesterday’s data in for our Carry Trade model, we can see that nearly all measures of risk appetite jumped higher in the wake of the FOMC meeting yesterday. Junk bond spreads in particular have shot higher – amazing to think that investors are desperate to go after junk issues yielding less than 200 basis points on top of treasuries if the baseline fear here is that fiat currencies are meant to collapse here. The “logic “is so awful, it’s almost unbearable. One interesting note: EM spreads have not joined the party to the degree that volatility and other risk measures have. Just today, news emerged of HSBC warning of “bumps in the road” ahead for emerging markets. EM spreads and relative performance will be key parameters to follow in coming weeks.
We should remember that cost-push inflation from QE is a bigger risk and higher likelihood than healthy organic growth and it’s already happening. This is the worst kind of inflation - inflation that will squeeze margins for companies, who don’t and won’t have any pricing power in an environment where weak labor markets mean no pricing power for labor either and more money on the part of wage earners dedicated to bare necessities. Thanks, Ben!
At the rate things are going on commodity inflation, it will only be a matter of weeks before the Fed experiences almost unbearable pressure to cease and desist. That pressure starts at 100 dollars a barrel in crude oil. The only way the Fed is allowed to continue with QE beyond the next few months is if the fears of an economic slowdown are able to collapse the QE speculative bubble on itself and we quickly see a collapse in the twin commodity/equity bubbles.
At the rate things are going on commodity inflation, it will only be a matter of weeks before the Fed experiences almost unbearable pressure to cease and desist. That pressure starts at 100 dollars a barrel in crude oil. The only way the Fed is allowed to continue with QE beyond the next few months is if the fears of an economic slowdown are able to collapse the QE speculative bubble on itself and we quickly see a collapse in the twin commodity/equity bubbles.
Looking ahead
Greek election is up on Sunday and the government has promised to call a snap election if the result is a clear rejection of the austerity program. Will Greece belong to the EuroZone this time next year? It is very important from a technical standpoint that EURUSD is closing the week here well back below the 1.4160 old high. The election is a key event for either setting a new cycle of PIGS fears in motion or seeing the market getting back on the old “Respect for the tight, non-devaluing ECB” trade. The Euro’s star may have peaked for now in our view, as the EuroZone’s own internal strife may finally drag the currency down into the mud of more easing, liquidity facilities, and other attempts to hold the shaky edifice together, or we’ll see the PIGS address the real need to default and a massive hit to European banks that this would entail. Alternatively, the PIG countries can exit the union and devalue their currencies (lowest odds). Which way adds up to a stronger Euro? That’s what we thought…. We stick by our EURUSD 1.12 forecast for 12 months from now.
Greek election is up on Sunday and the government has promised to call a snap election if the result is a clear rejection of the austerity program. Will Greece belong to the EuroZone this time next year? It is very important from a technical standpoint that EURUSD is closing the week here well back below the 1.4160 old high. The election is a key event for either setting a new cycle of PIGS fears in motion or seeing the market getting back on the old “Respect for the tight, non-devaluing ECB” trade. The Euro’s star may have peaked for now in our view, as the EuroZone’s own internal strife may finally drag the currency down into the mud of more easing, liquidity facilities, and other attempts to hold the shaky edifice together, or we’ll see the PIGS address the real need to default and a massive hit to European banks that this would entail. Alternatively, the PIG countries can exit the union and devalue their currencies (lowest odds). Which way adds up to a stronger Euro? That’s what we thought…. We stick by our EURUSD 1.12 forecast for 12 months from now.
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