G3 Recap 1-07-11

Main Items:

  • US Payrolls printed just 103k vs 150k expected, with a +32k revision for Nov. Private payrolls increased 113k vs 178k expected. Government employment ex-Federal dropped 20k. UE dropped big to 9.4% vs 9.7% expected and 9.8% previously, due to a big -260k drop in the labor force, but also a big 297k gain in employment. , taking the participation rate down to 64.3%.
  • Bernanke’s testimony didn’t reveal much new info. He did say that it could take 4-5 years for the job market to normalize, which would be consistent with expected average job growth in the 200k range.
  • Canadian Employment rose 22k in Dec vs 20k expected and 15.2k previously on the back of strong growth in full time employment. The UE rate was unchanged at 7.6% vs 7.7% expected.

Overseas Data:

  • Italian UE rose to 8.7% in Nov vs 8.6% expected and previously
  • Taiwan Banks Cut Foreigners’ Deposit Rate to 0%, EDN Says
  • Agricultural Bank of China and China Minsheng Banking are both planning to tap the markets, as China’s banking sector prepares to meet stricter capital rules – WSJ.


  • So the ADP print was a mirage. This suggests that the consensus view of a slow recovery can continue to be consensus. The large output gap suggests that the belly of the curve should be able to continue its rally after the selloff of last month. Furthermore, 5yr yields printed a lower weekly high and low for the first time since early November. This also suggests that a countertrend move is likely in the next couple weeks.

  • Gold recovered from an$18 drop to close roughly unchanged on the day. Interestingly, there appears to be a surge of ETF buying in late December that has not translated into higher prices:

    It’s quite possible that the increase in real yields has acted as a headwind for gold prices over the past couple months, just as it did 1H2010. (The chart below regresses US real yields vs the log price of gold) If so, a treasury rally may be a positive catalyst.


6 thoughts on “G3 Recap 1-07-11

  1. think you hit nail on the head with your gold regression vs real yields. i guess using ln(gold) takes out the drift or growth rate it has exhibited for about a decade now. i guess 5-30s may also show something over the last 3 years or so … and that should re-steepen … so much for a debt ceiling.

    seems like piigs spreads will keep widening as huge concession being built up front for auctions which should cause of ECB reaction … what exactly, i just dunno …. some of these 6 month bills may look pretty good in 2 months after a real blowout but i would stay well clear of longer dated paper.

    overall i guess G3 steepners vs G20 flatteners as they have a lot more work to fight inflation … and i do think that makes it a rates trade rather than (buying) EM FX.

  2. Hey Bert!

    Yeah, the log helps the scaling a bit. A corollary, though, is that if these coefficients hold gold doesn’t have a ton upside left. (i.e. it probably won’t double from here) That’s actually pretty reasonable if the consensus view works out, since overnight real yields will once again turn positive once the Fed starts hiking.

    Re: piigs, I think you’re right, this thing still needs to get worse before a solution gets put in place. I was chatting with a friend about the possibility that the ECB leaves the unlimited LTRO’s in place as it hikes, maybe with a wider spread on the rate though. This way, it can contain piigs banks’ liquidity problems will still tightening overall policy. What do you think about that?

    You’re probably right on your 3rd pt as well. Looks like some interesting opportunities are setting up in Australia…

    1. on europe the problem is that there are so many possible scenario so maybe using the rumsfeld proposition of “knowns” may work-

      1. if they hike rates funding becomes more expensive for everyone; that should put a serious wabble into all piigs but also the (huge) covered bond market … and remember that the ecb accepts all sort of garbage as collateral so that on its balance sheet, govies are the minority. also, the ecb is underwater on its piigs position already.

      2. germany will start having an inflation problem with the UE rate at 5% and the export machine going … HICP should get up to 2.5% easy for EU but not so sure if 3% which seems a threshold. m1 and m3 still not flying-


      3. over the next 3 months, ECB will have to create conditions to stuff banks with EU credit … so I think EFSF will be back door to a europe wide semi-govt bond market. think KFW.

      4. an outright non sterlized piigs purchases or a QE jobbey is actually un-constitutional to the Germans. first up will be court rulings … which should be ok … ish … maybe!

      5. trichet leaves end of the year and given that he will be replaced by non-german northern european hard currency sock puppet.

      overall, longer-term, 2 currency blocks are required. medium term, imbalances should and can only be addressed fiscally … germanay et al need to cut spending faster. short term, latino brothers with trichet’s blessing will prevent hiking this year. very short term, hold on to your hats- the dealers balance sheets and risk appetite will make piigs paper a hot potato as ECB can only buy in secondary market.

      in summary, i don’t think they can hike until eonia/repo market is normalized (try and get 3month term repo quote on greece …) and piigs stabilized overall … whats the point of hiking and deteriorating further piigs funding costs/competitiveness.

      the mpc on the other hand … thats more in play.

      1. Bert – I think you’re right on most points, but I think that the ECB will hike with the expectation that the eonia/repo market will NOT be normal. The piigs are already paying interest rates that are too high, but the smaller, problematic countries will likely be fully funded for several years by the time the ECB hikes. As a result, the only support they need is liquidity, which excess liquidity and a depressed eonia rate can help offset. At the same time, in a couple years the EU will have a minimal output gap and the core will begin to overheat. In the absence of an EU-wide fiscal solution, my view is that this is the only path the ECB can take.

      2. quiet healthy to disagree. in terms of output gap, you are presumably referring to potential gdp rather than labor market as i suspect much of the inflation issues is coming through via USD debasement and direct impact on numeraire of USD priced commodities … labour markets still have a lot of slack.


        on a side note, perhaps we will finally start seeing german real estate pickup especially vs rest of world.

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