Recap 11-04-11

Main Items:

  • US Nonfarm Payrolls declined to 80k vs 95k exp and 103k prev. Last month’s print was revised higher by 55k.
  • UR declined to 9.0% vs 9.1% exp and prev
  • Merkel said the G20 failed to agree on IMF resources. The market was expecting an increase in lending capacity.
  • Canadian Employment dropped a sharp -54k in Oct vs 15k exp and 60.9k prev, driven by a decline in full time employment. This caused the UR to jump to 7.3% vs 7.1% exp and prev.
  • Reuters reports Papandreou has struck a deal to step down and hand power to a negotiated coalition government if he can survive the confidence vote tonight. The vote won’t happen until later tonight (6pm-8pm eastern time). If Papandreou does not survive the confidence vote, new elections have to be called immediately. If he survives, the coalition can be put in place to ratify the EU bailout terms with new elections not happening for 3-4 months.
  • Andtonis Samaras, a conservative opposition leader, signaled he would back the EU bailout deal but is also pushing for new elections as soon as possible. Samaras is a favorite to become the country’s next PM. WSJ


  • Italian PMI Services declined to 43.9 in Oct vs 45.5 exp and 45.8 prev. As a result, the EuroZone PMI Services for Oct was revised down to 46.4 vs 47.2.
  • EU PPI declined to 5.8% YoY as exp vs 5.9% prev


I have written in the past that EURUSD has performed much better than most market participants expected. This is because the periphery issues did not drive real money outflows like many participants expected. Instead, and to much surprise, inflows have remained steady and even increased. This may have been due to the differential in real interest rates across the Atlantic, which were strongly favorable for the EU.
With the ECB cut yesterday, and with the fairly neutral FOMC statement yesterday, the last reason is starting to fade. After rising for several months, Germany-US interest rate differentials (red) are now again moving lower again. As a result, the scope for a decline in EURUSD has now improved, even as the prospect for a long term solution to the EU crisis remains unresolved.

It should be noted that speculative positions remain quite short. But given the recent 10 figure run up, most short term holders have likely covered by now.


2 thoughts on “Recap 11-04-11

  1. You are right, capital inflows into Europe has held up despite ongoing peripheral concerns. The market is conditioned to read it positively, but could these flows be the result of eu banks deleveragong and repatriating the proceeds to meet the new capital requirements? Then should be neg overall.

    1. Good point.
      That is certainly happening, but it’s not clear on what scale. I am not sure how an EU bank’s US subsidiary’s transfer of capital to its parent is accounted for in the flows data. And the recent jump in flows appears to be driven by non money market fixed income. Given where the EURUSD basis is, It is possible that EU banks are borrowing from their affiliates rather than repatriating capital, but this means their leverage is the same or higher. In either event, credit availability in the US will be impacted to some degree.

      One could argue that lower leverage is a positive for risk at this juncture. The problem seems to be that many of the more levered banks don’t want to do this given the cost of equity. I suspect that EU banks have already done their best to repatriate capital by now – there is probably not a lot more they can do.

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