Friday, June 3, 2016

1--Surprise! Another reason to not raise rates--US created 38,000 jobs in May vs. 162,000 expected

Job creation tumbled in May, with the economy adding just 38,000 positions, casting doubt on hopes for a stronger economic recovery as well as a Fed rate hike this summer.
The Labor Department also reported Friday that the headline unemployment fell to 4.7 percent. That rate does not include those who did not actively look for employment during the month or the underemployed who were working part-time for economic reasons. A more encompassing rate that includes those groups held steady at 9.7 percent....

The disappointing report immediately clouded the possibility of a Fed rate hike in June or July.

2---Americans Not In The Labor Force Soar To Record 94.7 Million, Surge By 664,000 In One Month

Adding the number of unemployed workers to the people not in the labor force, there are now over 102 million Americans who are either unemployment or no longer looking for work.

3--There's a $1 trillion bubble that's ready to burst

"Simply put, lower quality firms have been structurally increasing debt faster than earnings as interest rates have declined," Mish said....

at the bottom-most levels of junk, there is a bubble forming.
"We believe roughly 40% of all issuers are of the lowest quality, and roughly $1tn which will end up 'distressed debt' in this cycle," Mish wrote. "Much of the debt was bought to pick-up yield linearly, but the default risk is exponential."
So how did we get here? Mish believes there are three circumstances that have inflated the bubble:
  1. Central bank support allowed zombie companies to stay afloat, carrying over larger debt loads and then adding even more of it on top of unproductive firms.
  2. Low-yields in Treasuries forced pension funds and other investors with nominal return targets toward more speculative debt in order to meet those goals. "Investors were herded into lower-quality credit risk for a yield pick-up of a couple hundred basis points," Mish wrote.
  3. The heightened demand from these funds for high yields created ease of access for speculative-grade issuers to find a market for their debt. "The proportion of triple C rated issuers in its speculative grade universe (bonds and loans) reached a new record to start 2016; 1,356 out of 3,181 issuers or about 42% of the total," Mish said...

4--A 'tsunami' is about to overwhelm the debt market

three short-term reasons for a coming increase in the number of firms unable to pay back their debt. They are:
  1. Decreasing profits: Mish notes that corporate profits fell 7.6% in the first quarter against the same period a year ago. In order to pay back loans, companies need to continue to make more, and with less cash coming in, there will be less to allocate to debt.

5--U.N. adds Saudi coalition to blacklist for killing children in Yemen

6--France is protesting against Europe

The core of the proposed labor law can be found in its disputed Article 2. Essentially, the passage stipulates that every labor negotiation be made in the framework of individual companies, whereas in the past these took place on a national or sector level. The crux of the problem is that this will dramatically weaken workers’ position. Valls and El Khomri have made it clear they are unwilling to negotiate on that point.

And yet a large majority of the population clearly opposes this law. The latest polls show 69-74 percent of voters are against it. So it’s obvious where the silent majority’s sympathies lie. The rise of widespread protests was even mirrored in the Socialist Party, where 40 deputies threatened to abstain from the vote.

The government, deprived of its majority, used a constitutional trick: article 49-3, designed to avoid parliamentary gridlock and allow the government to force passage of a bill. The move amounted to nothing less than a brazen misappropriation and a denial of democracy. Outside the government, you’d have to go to the political Right to find support for the text....

It is obvious that the principles of the El Khomri law are directly inspired by suggestions — some would call them demands — of the European Union. The law is arguably a strict application of the Lisbon Strategy, the “Broad guidelines for economic policies” and country-specific recommendations drawn up by the European Commission, which has for a long time prescribed budgetary Malthusianism and wage moderation

The EU, as well as the Eurogroup, imposes specific methods of governance and a rigid disciplinary framework on its members. As a result France, no longer able to devalue, can only restore competitiveness with less expensive wage policies. Governments in Spain, Portugal, Italy and Greece are headed in the same direction.

The movement is a call for greater sovereignty against measures that, more and more, appear dictated from the outside. Today, the target is a social issue; tomorrow, protests will no doubt take aim at monetary policy regime imposed by the euro.

France’s current social unrest, because of this inextricable context, has become a generalized challenge to the strict rules of eurozone and EU membership. In this way, it is reminiscent of public mobilization against the Treaty establishing a Constitution for Europe in 2005, which 55 percent of French voters rejected in a referendum. The current wave of social protest risks reshuffling the odds and swaying the 2017 presidential elections in much the same way

7--Behind Rosy Scenario, Commercial Bankruptcies Soar

8--Helicopter Money?

The final edition of his three-part series on the more unconventional measures the Fed could pursue focused on an option Milton Friedman bandied about at the tail end of the 1960s: helicopter money. This entails central banks coordinating with the fiscal authority to finance the mailing out of a check to every citizen, or perhaps a slew of new infrastructure projects

Toby Nangle, head of multi-asset allocation at Columbia Threadneedle Investments, contends that major central banks and governments have already done something that differs from helicopter money in form, but not in function. He claims that if a central bank is engaging in quantitative easing — buying sovereign bonds — at the same time the government is embarking upon a more expansionary fiscal policy, this constitutes de facto helicopter money.

"Given that debt is effectively canceled from the moment it is bought by the central bank from a monetary and fiscal perspective, the debt service and monetary effects of QE and helicopter money appear the same," he writes. "The implementation of quantitative easing during periods of fiscal expansion in the UK, US and Japan have effectively already delivered ex post helicopter money."

9--Abenomics failure hastens arrival of helicopter option

Japan can change the relative supply of yen versus dollars by increasing the money supply in its domestic economy. As markets are currently discounting the large scale QE already underway and the BOJ continues to be challenged to find assets to effectuate the existing program, helicopter money, more formally known as a money-financed fiscal expansion, offers a powerful new means to increase the supply of yen versus other currencies.

Under such a program, Japanese authorities could announce large new supplies of yen to be distributed directly into the economy as tax cuts or through spending. The size of this new monetary program could be modulated based on macro variables such as output and inflation or even the exchange value of the yen.

Japan's government is certainly determined, but its policy options are becoming increasingly limited. Despite aggressive measures already undertaken, real domestic output today is still no higher than it was in 2008, prior to the financial crisis.

Unwittingly, G7 leaders may have hastened the implementation of helicopter money in Japan. Japanese policymakers have shown a strong willingness to experiment with new policy innovations to push the economy ahead. If Japan lends its credibility to helicopter money by becoming the first to legitimize its use, then other nations may soon follow. The unintended consequence of the G7's failure to act may well be the catalyst which results in further experiments becoming part of the new monetary orthodoxy around the world.

10--ECB Keeps Interest Rates Unchanged as Draghi Stresses Need for Patience

Mr. Draghi highlighted risks to the growth outlook related to developments in the global economy, including a possible exit of Britain from the European Union. But he said the ECB’s current policies “make a lot of difference,” and that investors should wait “to see the full effects of what has been decided.” The bond-purchase program, he added, is proceeding smoothly, and could be adjusted if policy makers face constraints in the quantity of bonds they can buy.

“With so many of the announced programs still to really get under way and the impact of past policy measures still unclear, we suspect they will be standing pat on major innovations for several more months,” said Tim Graf, head of macro strategy for Europe at State Street Global Markets.
(What "difference"?)

11--The ECB: How It Is Playing for Time  

The ECB’s latest inflation forecasts show the central bank remains very cautious

(latest stimulus produces no move in inflation)

The biggest surrounds the ECB’s forecasts for inflation. There had been an expectation that these forecasts would be shifted higher, in part because of the sharp increase in oil prices in recent months and because policy was loosened in March.

In the end, the forecast for 2016 was lifted marginally to 0.2% from 0.1%, while the 2017 and 2018 forecasts were left unchanged at 1.3% and 1.6%, respectively. A generous reading would be that at least the forecasts have stopped sliding; but they still signal that the ECB is falling short of its objective of returning inflation to close to 2%. They also show that underlying inflationary forces remain weak. Mr. Draghi in particular cited the absence of wage pressures....

the central bank might yet need to deliver even more stimulus. That is even though Mr. Draghi was eager to argue that current policy and measures yet to be implemented, such as corporate bond purchases and a new bank lending program that start in June, are having an important effect. 

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